Is CVS Stock Undervalued?

CVS Health Corp (NYSE:CVS) seems well-prepared for the times we’re living in. Whether you need a flu shot, hand sanitizer, or something to eat, the company has you covered. Yet it still managed to underperform the stock market throughout the pandemic.

The company’s market price has been deflating since it reached its highest market value in 2015. And its big acquisition of Aetna didn’t spur a growth curve.

With the coronavirus still spreading and the flu hitting too, some analysts wonder – is CVS stock undervalued?

CVS 101

The company is still earning money at a time when retail is struggling. It also started a hiring spree in late October to add 15,000 pharmacy technicians and other workers to beef up its staff in anticipation of a winter rush.

The stock also pays $2.00 per year per share, for a 3.36 percent dividend yield.

Still, both CVS and rival Walgreens Boots Alliance Inc (NASDAQ:WBA) have been in a slide in 2020 with investors. This points to a possible industry-wide problem that needs to be resolved. Let’s examine it.

Why CVS Stock Is Down

Both CVS Health and Walgreens responded to the pandemic by offering drive-through COVID-19 testing.

The company experienced a boost in sales during the first quarter of 2020 as consumers stocked up on essential goods when lockdowns were first announced.

This led to a flood of people renewing their prescriptions, as well as picking up over the counter drugs and hand sanitizer.

In addition, the company’s stake in Aetna paid off, as the decrease in elective procedures led to lower benefits payout costs.

However, this bump soon dissipated, and the company’s stock declined by 12 percent as the World Health Organization declared a global emergency.

Still, it beat earnings estimates for its first quarter and regained some of its losses before diving again after its second quarter earnings were announced in August.

This is despite the company outpacing analyst forecasts and even increasing revenues by 3 percent to $65.3 billion for the quarter compared to the previous year.

Doing well doesn’t seem to mesh with stock prices dropping, so let’s dive further into the company’s financials.

CVS Financials Are Improving

Despite slumping market values, CVS has decent earnings reports for 2020. Its second quarter 2020 revenue gained 3 percent over the prior year’s quarter. This led to $2.99 billion in income, compared to $1.93 billion the same quarter of prior year.

This is despite shelter-in-place orders causing fewer provider visits for most of the year. The company still has a cash flow around $12 billion for the quarter, and its earnings average out to $2.64 per share. This allowed it to pay out its $2.00 annual dividend for the year.

The company is number 5 on the Fortune 500, and it paid its dividends for 95 straight quarters. It managed 9,900 retail locations, and it’s estimated that 70 percent of the U.S. population lives within 3 miles of a CVS Pharmacy.

It has over 1,100 walk-in medical locations (dubbed MinuteClinic), and 1,800 drive-through COVID-19 testing locations.

Its operating income is $12 billion, and it has total assets of $222.4 billion, while long-term debt is sitting at $63.9 billion.

This high debt has some investors wondering if CVS is overvalued while many others believe it may be valued too low.

Is CVS Valuation Too Low?

CVS is trading at around the $60 range heading into November 2020. This gives it a market cap of nearly $80 billion, based on a P/E ratio of 9.35.

It’s trading much closer to its 52-week low of $52.04 than its 52-week high of $77.03. This gives it plenty of room to grow, especially since it traded in the $100 range as recently as 2016.

With the economy sliding, it seems like CVS is positioned well as a value stock with plenty of growth potential.

And it does have growth potential – CVS’s partnership with Aetna gives it a vertical integration that moves toward the company providing more medical services.

It’s simultaneously a retail store, a pharmaceutical company, and a healthcare provider. This gives it both the good and bad of each of these industries, and that’s mostly why investors are uneasy and trading it for cheap.

Its competitor Walgreens is also struggling, although it’s doing marginally better. Both companies have great long-term prospects as the aging population grows, leading to a greater need for its pharmacy services.

Still, the company’s market value is less than 10x the company’s annual earnings for 2020. Some investors are bullish on the company gaining value.

Will CVS Stock Rise?

CVS stock is bound to be turbulent for the next year. This is because of the long-term effects of the coronavirus. While the initial pandemic is often tied to the lockdowns in April, it’s still a major issue in the fourth quarter holiday season as flu season starts.

People still haven’t returned to normal, and many of the vaccines paid for by Operation Warp Speed are slow to show positive results. This could cause the company to struggle to regain its market value.

Still, its strong revenue growth and dedication to servicing both flu and coronavirus patients will help it make up for lost revenues in its retail stores.

Is CVS Stock Undervalued? The Bottom Line

CVS Health is a longtime leader in the pharmaceutical retail space. It’s estimated that 70 percent of the U.S. population lives within 3 miles of a CVS Pharmacy.

The company capitalized on the coronavirus pandemic by offering drive-through testing services in the social distancing age. It’s also upping its flu shot game to make up for lost retail revenues.

If you’re seeking a great value stock, CVS has growth potential of 20 percent or more over the next two years. It has strong earnings and continues its long streak of paying dividends to shareholders. This gives analysts a reason to be bullish on CVS stock during the 2020 holiday season.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.