CVS Health stock (NYSE: CVS) saw a 15% fall in the last twelve months, in line with the broader S&P500 index, which was down 13%. However, in the longer term, CVS stock, with a 33% rise from levels seen in late 2018, has underperformed the S&P 500 index, up about 56%. We believe that CVS stock is undervalued at its current level of about $90, as discussed below.
This 33% rise for CVS stock since late 2018 is driven by: 1. CVS Health’s revenue, which grew 62% to $315 billion currently, compared to $195 billion in 2018. This was partly offset by 2. the company’s P/S ratio, which declined slightly but remained at around 0.4x, and 3. a 12% rise in its average shares outstanding to 1.3 billion from 1.2 million in 2018. This has meant that the company’s revenue per share grew 44% to $240 from $166. Our dashboard – Why CVS Health (CVS) Stock Moved – provides more details on the factors behind this move over the last three years.
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The revenue growth over the recent past has been led by a very high demand for Covid-19 testing and vaccine administration. Also, the Aetna acquisition bolstered CVS’ sales in 2019. Even during the pandemic, CVS has seen steady growth in all its businesses – pharmacy services, retail pharmacy, and health care benefits. The company’s healthcare benefits segment has seen an 18% rise in revenue between 2019 and 2021, led by a rise in total medical membership, which currently stands at 24.4 million, compared to 22.9 million in 2019. This trend is expected to continue over the coming years, given the aging U.S. population.
However, the demand for Covid-19 testing and its vaccine administration is expected to decline, likely weighing on the overall revenue growth for CVS in the coming quarters. That said, it should benefit from its proposed acquisition of Signify Health – a home healthcare services company. Earlier this month, there were reports of CVS planning to acquire Oak Street Health for $10 billion. 
CVS stock was weighed down in recent months due to a downgrade in its largest health insurance plan for Medicare patients, with 1.9 million members. The reduced rating implies the plan’s ineligibility for performance-based bonus payments from the government in 2024. The investors were concerned about its impact on earnings, resulting in a sharp fall in CVS stock. In the previous quarter, CVS took a one-time charge of $5 billion to settle all opioid-related litigation.
Looking at CVS stock, it appears undervalued. We estimate CVS Health’s valuation to be $125 per share, reflecting a significant 40% upside from its current market price of $88, implying that investors may be better off using the recent dip to enter CVS stock for solid gains in the long run. At its current price, CVS stock is trading at 10x P/E multiple based on our earnings forecast of $8.94 on a per share and adjusted basis for full-year 2023, and this compares with a little over 12x figure seen at the end of 2021.
While CVS stock is likely to see higher levels, it is helpful to see how CVS Health’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Target vs. Emergent Biosolutions.
|S&P 500 Return||2%||2%||74%|
|Trefis Multi-Strategy Portfolio||5%||5%||231%|
 Month-to-date and year-to-date as of 1/20/2023
 Cumulative total returns since the end of 2016
- CVS Health May Buy Oak Street Health. Should You Buy CVS Stock?, Bret Kenwell, The Street, Jan 10, 2023 [↩]