CVS analysis. Is it really undervalued, as many analysts claim?

Today we take a look at CVS stock, which has been in the spotlight lately with analysts highlighting the long-term potential and attractiveness of today's price. What makes the company interesting? Is the current price attractive?


What is the company's business?

Consumer Value Stores (CVS) was founded in 1963. CVS Health Corp $CVS-0.6% is a health care company that operates in several related industries, including retail pharmacies, pharmacy and health services management, and health insurance.

CVS currently operates more than 9,900 retail pharmacies in the United States and offers a range of products and services, including prescription drugs, over-the-counter medications, beauty products, and essential household items.

  • The number of employees is reported to be around 300,000.
  • The company has a market capitalisation of $112 billion

In addition to its retail pharmacy operations, CVS Health also operates a large pharmacy benefits management (PBM) business that serves employers, insurers, and government health programs. The company has also expanded into the medical services sector, offering medical clinics and physician services at some of its retail locations.

CVS's portfolio also includes retail clinics: CVS operates MinuteClinic, a retail medical clinic that provides basic health services such as immunizations and routine checkups.

Not to go into all the details here, CVS is, in short, a very well-diversified company that has a really comprehensive portfolio in terms of revenue, helped in particular by acquisitions in recent years (we'll get to that below).

The company's largest customers include: employers, insurance companies, unions, and government employees.

Now, let's take a look at what will matter to investors 👇

Taking it one step at a time, CVS Health Corp is part of the S&P 500 index, which of course carries many benefits. Companies that are included in the index are usually more attractive to investors because they are considered some of the largest and most successful companies in the U.S. stock market, have better liquidity and more trading activity compared to competitors that are not in the index.

A look at the individual numbers


1.If you're wondering about 2018, let me explain the situation right away. CVS made a massive investment (acquisition) in 2018, to the tune of $69 billion, in the health insurer Aetna.

So the drop in net income that you see in 2018 was primarily due to one-time costs associated with the acquisition, including transaction costs, integration costs, and amortization of intangible assets. These one-time costs impacted the Company's earnings and caused the decrease in net income.

It is important to note that the acquisition was a significant strategic move for CVS, positioning the company as a leader in the rapidly evolving healthcare industry. The acquisition added a significant new line of business to CVS's operations and expanded its capabilities in areas such as health insurance, pharmacy benefit management and clinical services.

2. In addition, CVS recently announced the $8 billion acquisition of Signify Health, which is expected to be completed in the first half of 2023.

3. There is currently talk of another possible addition to the company, which could be Oak Street Health Inc for approximately $10.5 billion (including the company's debt). These acquisitions could have lucrative long-term revenue benefits. Still, Wall Street noted that CVS's potential acquisition of Oak Street Health makes strategic sense, but could weaken CVS's bottom line, especially with its already planned acquisition of Signify Health, which further sparked the recent decline in CVS stock.

Thecompany's financial results over the years

Thecompany's revenue has grown steadily from 2006 to the present, and if we take it directly to the numbers, during this period, revenue has grown from $43.9 billion to $314 billion in 2022 (growing revenue at an average of 11% per year).

As you can see, Operating Income or Operating Profit has been increasing over the last 5 years, as has Net Income or Net Profit. For Net Income, again, we see only a minor blip in 2018, but that is justified by the aforementioned acquisition. On average, then, operating profit has grown 6.8% per year over the last 5 years.

The company'stotal assets currently stand at $230 billion, while liabilities are $160 billion with long-term debt of around $50 billion. Debt has risen mainly due to the 2018 acquisition but is being gradually reduced ( in 2018 long-term debt was at over $70bn).

For 2022, the cash position has reached just under $20bn, up 55% year-on-year from $12.6bn in 2021.

I also like the relatively steady growth in cash flow from operations, which has climbed to $18.1bn in 2022, while capital expenditure (CAPEX) is being kept pretty much flat ($2.6bn).

ROIC - which is a measure of the profitability and value creation potential of companies in relation to the amount of capital invested by shareholders, was fairly stable prior to 2018 and saw single digit growth, then came 2018 and with the acquisition came the slump. However, over the last 4 years we have seen the return on invested capital slowly rise again.

ROE or return on equity has not changed much in the last 3 years, holding steady at 10.3-10.5%.

ROC or return on capital has also been slightly stagnant at 5.4-5.5% over the last 3 years.

Comparison of CVS growth x sector average

Number of Shares Issued - The number ofshares issued has increased sharply over the years or from 2018 to 2019, however, this was again linked to raising money for a very expensive acquisition. Looking at the last 3 years, the number of shares outstanding is virtually constant and the number of new shares outstanding is not growing.


Dividend 2.6%

According to the data, we can see that the sustainability of the dividend is almost clear, the cash is definitely there, and we can also count on increases over the years.

The dividend has been paid for over 14 years and apart from a slight stagnation during 2018-2021 (it has not been increased, just held at the same level) we see regular payouts and increases. In 2018-21, it was clear that the company would go more aggressively after debt reduction, so dividend growth will be on the back burner.


P/E 36.23

P/B 1.59

P/S 0.397

P/C 5.6

P/FCF 6.76


One of the major risks recently has been the lawsuit that has been directed at CVS and Walgreens over the sale of opioids. However, that litigation was settled at the end of 2022, and neither company has admitted guilt in the case, but they have been proven guilty. The penalty is $10bn combined, so each company takes home a $5bn fine.

More here 👇

What to expect from the next quarter?

Tomorrow the company is due to present us with Q4 2022 results.

Analysts say: We expect CVS stock to trade sideways after the earnings announcement, with Q4 revenue likely to fall slightly below and earnings in line with consensus estimates. While we expect the company to report steady growth in its healthcare and pharmacy services businesses, higher costs and lower contributions from the government for Covid-19 vaccines are likely to weigh on its overall performance.

What about the current price?

Generally, this type of company is resilient in a challenging market environment, however, on the yearly chart we see that the stock price has been hit by a decline of over 20%, which many analysts say is interesting from an entry price perspective as most are giving price targets of $110-$115 per share.

Personally, however, I would not be willing to accept a price of $85 per share and would call for at least a drop below $80 (preferably to $75). Going forward, in my opinion, this could be a good entry point, but we have to take into account that the company is going aggressively after acquisitions, which it does not intend to stop doing anytime soon, it still has to reduce its relatively high debt, deal financially with the case and the compensation, and the prospects in the short term are not yet optimal.

Tomorrow's quarterly report and the subsequent outlook towards 2023 will tell us more.

Please note that this is not financial advice. Every investment must undergo a thorough analysis.

Read the full article for free?
Go ahead 👇

Do you have an account? Then log in . Or create a new one .

No comments yet
Timeline Tracker Overview