CVS Health stock (NYSE: CVS) currently trades at $66 per share, about 12% lower than the level seen in March 2021, and it can see higher levels over time. CVS stock was trading at around $93 in early June 2022, just before the Fed started increasing rates, and is now nearly 30% below that level, compared to 19% gains for the S&P 500 during this period. This underperformance of CVS stock can be attributed to its rating downgrade in its most extensive 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. Also, investors still have concerns about a potential recession despite a steady decline in the inflation rate in response to the Fed’s aggressive rate hike plan.
We note that CVS stock has had a Sharpe Ratio of 0.0 since early 2017, much lower than 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
Returning to the pre-inflation shock level of about $111 means that CVS stock will have to gain nearly 70% from here, and we don’t think this will materialize anytime soon. That said, there is upside potential from its current levels. We estimate CVS Health Valuation at $90 per share, reflecting over 35% upside.
Our detailed analysis of CVS Health’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.
2022 Inflation Shock
Timeline of Inflation Shock So Far:
- 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
- Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
- April 2021: Inflation rates cross 4% and increase rapidly.
- Early 2022: Energy and food prices spike due to Russian invasion of Ukraine. Fed begins its rate hike process.
- June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
- July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
- Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.
In contrast, here’s how CVS stock and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index.
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08).
- 3/1/2009: Approximate bottoming out of S&P 500 index.
- 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008).
- EW and S&P 500 Performance During 2007-08 Crisis.
CVS stock saw a 30% decline between August 2008 (pre-crisis peak) and March 2009 (as the markets bottomed out). It surged post the 2008 crisis to levels of around $32 in early 2010, rising about 25% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.
CVS Fundamentals Over Recent Years
CVS Health’s revenue rose from $257 billion in 2019 to $323 billion in 2022, led by increased prescription volume, pharmacy claims, and price inflation. The Covid-19 testing and vaccine administration also bolstered the company’s top-line growth in recent years. The company’s operating margin fell from 4.6% in 2019 to 2.4% in 2022, as the post-pandemic period resulted in increased medical costs. Our CVS Health Operating Income Comparison dashboard has more details. Its earnings per share stood at $3.16 in 2022, compared to the $5.10 figure in 2019.
Does CVS Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?
CVS Health’s total debt declined from $68 billion in 2019 to $52 billion in 2022, while its cash increased from around $8 billion to $16 billion. The company also garnered $16 billion in cash flows from operations in 2022. Given its good cash cushion, CVS appears to be in a good position to service its near-term debt obligations.
With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe CVS stock has the potential for gains once fears of a potential recession are allayed. That said, the ratings downgrade and its impact on the top and bottom line, along with increased medical costs in the near term, remains a risk factor to realizing these gains.
|S&P 500 Return||0%||17%||101%|
|Trefis Reinforced Value Portfolio||-1%||30%||569%|
 Month-to-date and year-to-date as of 9/6/2023
 Cumulative total returns since the end of 2016
Invest with Trefis Market Beating Portfolios
See all Trefis Price Estimates