CVS Health (NYSE: CVS) not too long ago reported its Q1 outcomes, with revenues and earnings lacking our estimates. The corporate reported income of $88.4 billion and adjusted earnings of $1.31 per share, a lot decrease than our estimates of $90 billion and $1.74, respectively. Not solely did the corporate report a downbeat Q1, it reduce its full-year steerage, which didn’t sit nicely with the buyers. Though we reduce our worth estimate for CVS by 18% following its Q1 outcomes and up to date outlook, it’s nonetheless nicely above the present market worth. On this word, we focus on CVS’ inventory efficiency, key takeaways from its latest outcomes, and valuation.
Firstly, allow us to have a look at CVS’ inventory efficiency lately. CVS inventory has confronted a notable decline of 20% from ranges of $70 in early January 2021 to round $55 now, vs. a rise of about 35% for the S&P 500 over this roughly three-year interval. Nevertheless, the lower in CVS inventory has been removed from constant. Returns for the inventory had been 51% in 2021, -10% in 2022, and -15% in 2023. Compared, 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 truth, persistently beating the S&P 500 — in good instances and unhealthy — has been tough over latest years for particular person shares; for heavyweights within the Well being Care sector together with LLY, UNH, and JNJ, and even for the megacap stars GOOG, TSLA, and MSFT. In distinction, the Trefis Excessive High quality (HQ) Portfolio, with a set of 30 shares, has outperformed the S&P 500 annually over the identical interval. Why is that? As a bunch, HQ Portfolio shares supplied higher returns with much less danger versus the benchmark index; much less of a roller-coaster experience, as evident in HQ Portfolio efficiency metrics.
Given the present unsure macroeconomic setting with excessive oil costs and elevated rates of interest, might CVS face an analogous scenario because it did in 2023 and underperform the S&P over the subsequent 12 months — or will it see a restoration? From a valuation perspective, CVS inventory appears it has room for development. We estimate CVS Well being’s Valuation to be $72 per share, reflecting over 25% upside from its present worth of round $56. Our forecast is predicated on a 9x P/E a number of for CVS and anticipated earnings of $7.70 on a per-share and adjusted foundation for the complete 12 months 2024. The 9x P/E ratio is barely decrease than the inventory’s 10x common over the past 5 years.
CVS Well being’s income of $88.4 billion in Q1 was up 4% y-o-y, led by development in Well being Care Advantages, which noticed a stable 25% y-o-y development. The Pharmacy & Shopper Wellness section noticed its gross sales rise by 3%. Nevertheless, Well being Companies income plunged 10%. The corporate’s adjusted working margin declined by 180 bps to three.3% in Q1. This may partly be attributed to a 580 bps rise in medical profit ratio (MBR) to 90.4%. The MBR metric was a lot increased than a lot of the avenue estimates. This resulted in an adjusted revenue of $1.31 per share, reflecting a big 40% fall from its $2.20 determine within the prior-year-quarter.
Trying ahead, CVS has reduce its outlook. It now expects its earnings to be within the vary of $7.00 and $8.30 on a per share and adjusted foundation in 2024, in comparison with $8.74 in 2023. This may primarily be attributed to increased anticipated medical prices. Though CVS inventory is dealing with headwinds, it appears to have ample room for development. At its present ranges, CVS is buying and selling at 7x ahead earnings, in comparison with the final five-year common of 10x. Whereas we expect a slight decline in valuation a number of appears justified for CVS, 7x appears just a little overdone.
| Returns | Might 2024 MTD [1] |
2024 YTD [1] |
2017-24 Whole [2] |
| CVS Return | -20% | -32% | -32% |
| S&P 500 Return | 0% | 6% | 125% |
| Trefis Strengthened Worth Portfolio | -1% | -1% | 604% |
[1] Returns as of 5/2/2024
[2] Cumulative whole returns for the reason that finish of 2016
Make investments with Trefis Market-Beating Portfolios
See all Trefis Price Estimates
The views and opinions expressed herein are the views and opinions of the writer and don’t essentially replicate these of Nasdaq, Inc.
