Why Is CVS Stock Down?

Why CVS Stock Is Taking a Beating

The primary cause of CVS’s share price woes is lower forward guidance on sales and earnings growth.

In 2023, management expects to see growth of 3-5 percent. In 2024, however, this already fairly slow growth rate is expected to contract even further. This slow growth could cause the company to underperform over the long term, as management does not expect significantly faster growth rates through 2025.

Behind these projections is a downgrade of CVS’s Medicare rating that occurred in October. Due to this downgrade, CVS will likely not be eligible for performance bonuses from the program. Due to the company’s shift toward medical services in recent years, matters that affect Medicare payments have an increasingly large impact on CVS’s bottom line.

Like other pharmacy chains, CVS has also run into staffing problems due to a shortage of skilled labor. In response, the company is in the process of cutting pharmacy hours at about two-thirds of its locations.

CVS is far from the only major chain that has seen its pharmacy business struggle with staffing challenges. Both Walmart and Walgreens are also paring back pharmacy hours.

Large chain pharmacies are often high-stress environments for pharmacists, leading many to seek employment in smaller, lower-traffic businesses. This fact may make it difficult for CVS to attract new talent and adequately staff its pharmacies going forward.

Is CVS Currently Undervalued?

Although the company will very likely see slower growth going forward, CVS could still have potential as a value investment.

At just 8.4 times expected earnings and 0.30 times sales, CVS is priced like a company that will see virtually no future growth. CVS is also priced at just over 6 times cash flow, strongly suggesting that the stock is currently undervalued.

The case for undervaluation is also supported by current analyst price forecasts. As a result of the massive decline CVS has seen in recent weeks, the stock currently trades 47.4 percent below the consensus fair value price of $110.50 per share.

Even the most bearish price target of $95 would give CVS a 26.8 percent upside over the coming year. While management’s new guidance could certainly result in lower returns, the stock seems to be trading at a compelling valuation for long-term investors.

It’s also important to consider the fact that CVS pays a fairly high dividend. The stock currently pays $2.42 per share annually, a yield of over 3.2 percent. The company has only raised its payout for one year, but this is largely due to a temporary hold on dividend increases that occurred after the 2018 acquisition of Aetna.

CVS is expected to maintain a compounded dividend growth rate of 3.25 percent over the next three years, potentially rewarding shareholders who buy the current dip with a strong source of portfolio income.

Finally, CVS is still making acquisitions that could add value to its business over the long term. One such acquisition was the $10.6 billion purchase of Oak Street Health, a primary care company focused on older patients. The company also agreed to purchase Signify Health, a health risk assessment leader with a nationwide provider network.

Both of these companies have proprietary technology platforms and large networks that could significantly bolster CVS’s presence in the primary healthcare industry.

Declining Earnings A Serious Headwind?

Slowing earnings growth is the most obvious headwind facing shareholders hoping for a turnaround in price action.

Management’s own guidance seems to be fairly pessimistic through about 2025, suggesting that investors may see anemic earnings growth for the foreseeable future. The bearish market sentiment that now surrounds the stock could keep it trading at low multiples until the company finds new growth drivers.

While CVS doesn’t carry an unreasonable debt load, the company’s debt-to-equity ratio is somewhat high at 0.71. It’s worth noting that some of this debt came from the use of existing finance capacity for acquisitions. CVS’s debt may be higher than ideal, but the company appears to be using its credit lines to purchase valuable assets that could synchronize with its existing business lines.

CVS is also operating on low margins that could put it at risk if prices for goods and labor continue to increase. Its return on equity, however, is quite a bit more positive at 15.75 percent. Nevertheless, low margins could represent a problem for the company, especially as sales growth slows.

Is CVS a Buy While Prices Remain Low?

CVS stock has both its merits and its drawbacks as an investment. The company’s slowing growth is a deterrent; CVS may be unable to capitalize on the beginning of a new bear market later this year or in early 2024.

On the other hand, it appears that the stock is trading below its fair value and could generate decent returns if and when the market adjusts its view of the company.

Overall, CVS appears to be a moderate buy for value investors and investors seeking decent income at fairly low risk levels. The company’s prospects over the next few years, however, largely rule it out as a good fit for growth investors. T

hose who buy CVS should also note that bearish sentiment around the stock and a generally negative macroeconomic environment could keep it at depressed prices for some time. As such, investors should have a reasonably long time horizon before considering CVS.

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.