CVS Health (NYSE: CVS) recently reported its Q1 results, with revenues and earnings missing our estimates. The company reported revenue of $88.4 billion and adjusted earnings of $1.31 per share, much lower than our estimates of $90 billion and $1.74, respectively. Not only did the company report a downbeat Q1, it cut its full-year guidance, which didn’t sit well with the investors. Although we cut our price estimate for CVS by 18% following its Q1 results and updated outlook, it is still well above the current market price. In this note, we discuss CVS’ stock performance, key takeaways from its recent results, and valuation.
Firstly, let us look at CVS’ stock performance in recent years. CVS stock has faced a notable decline of 20% from levels of $70 in early January 2021 to around $55 now, vs. an increase of about 35% for the S&P 500 over this roughly three-year period. However, the decrease in CVS stock has been far from consistent. Returns for the stock were 51% in 2021, -10% in 2022, and -15% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that CVS underperformed the S&P in 2023.
In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Health Care sector including LLY, UNH, and JNJ, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could CVS face a similar situation as it did in 2023 and underperform the S&P over the next 12 months — or will it see a recovery? From a valuation perspective, CVS stock looks it has room for growth. We estimate CVS Health’s Valuation to be $72 per share, reflecting over 25% upside from its current price of around $56. Our forecast is based on a 9x P/E multiple for CVS and expected earnings of $7.70 on a per-share and adjusted basis for the full year 2024. The 9x P/E ratio is slightly lower than the stock’s 10x average over the last five years.
CVS Health’s revenue of $88.4 billion in Q1 was up 4% y-o-y, led by growth in Health Care Benefits, which saw a solid 25% y-o-y growth. The Pharmacy & Consumer Wellness segment saw its sales rise by 3%. However, Health Services revenue plunged 10%. The company’s adjusted operating margin declined by 180 bps to 3.3% in Q1. This can partly be attributed to a 580 bps rise in medical benefit ratio (MBR) to 90.4%. The MBR metric was much higher than most of the street estimates. This resulted in an adjusted profit of $1.31 per share, reflecting a significant 40% fall from its $2.20 figure in the prior-year-quarter.
Looking forward, CVS has cut its outlook. It now expects its earnings to be in the range of $7.00 and $8.30 on a per share and adjusted basis in 2024, compared to $8.74 in 2023. This can primarily be attributed to higher expected medical costs. Even though CVS stock is facing headwinds, it seems to have ample room for growth. At its current levels, CVS is trading at 7x forward earnings, compared to the last five-year average of 10x. While we think a slight decline in valuation multiple seems justified for CVS, 7x seems a little overdone.
| Returns | May 2024 MTD [1] |
2024 YTD [1] |
2017-24 Total [2] |
| CVS Return | -20% | -32% | -32% |
| S&P 500 Return | 0% | 6% | 125% |
| Trefis Reinforced Value Portfolio | -1% | -1% | 604% |
[1] Returns as of 5/2/2024
[2] Cumulative total returns since the end of 2016
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
