Are Investors Undervaluing CVS Health Right Now?
The pandemic has highlighted the importance of pharmacy chains like CVS Health in the U.S. vaccination program.
While some companies in the healthcare space have received atypical attention amid the COVID-19 pandemic, the U.S.’ largest drug-store chain and insurer provider, CVS Health Corp. (CVS - Get Rating), has been far from riding the crest of the wave. Despite rolling out thousands of COVID-19 test sites across the country and now playing a key role in administering vaccine inoculations against the virus, the stock has lost 1.2% in the past year.
CVS has administered approximately 15 million COVID-19 tests nationwide at more than 4,800 CVS pharmacy locations. The company has reportedly administered three million doses so far in more than 40 thousand long-term care facilities. In addition, with the growing importance of healthcare facilities due to the COVID-19 virus and the general healthcare needs of America’s aging population, the company is well-positioned to grow significantly.
However, we believe that the market has not yet priced in the true potential of CVS and, as such, the stock is largely undervalued currently.
Let’s take a closer look at why we think CVS could be a solid investment:
Mass vaccination tailwinds
CVS is currently delivering 250,000 coronavirus vaccination shots per week at its pharmacies under the Federal Retail Pharmacy Program across 11 states. The company plans to increase vaccine delivery and expand into more pharmacies and states as soon as March or April if its vaccine supplies are increased as hoped. It plans to offer 20 -25 million shots per month. During a fourth-quarter conference call, CVS executive VP, Lotvin said that based on conversations with pharmaceutical makers, CVS estimates that approximately 500 million doses of vaccine will be made available to it between now and the end of June.
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Better-than-expected quarterly report
Yesterday, CVS presented solid financial results for the fourth quarter ended December 31, 2020. The company generated total revenue of $69.55 million, increasing 4% year-over-year, on the back of high prescription volumes and new customer foot traffic for COVID-19 testing and vaccination. Although same-store sales grew 5.3% year-over-year, front of store sales were down 1.8% due to weaker flu season and cold medicine demand. However, CVS reported an adjusted EPS of $1.30, beating consensus estimates by 4.8%.
CVS said it will next year re-enter the business of selling individual coverage on the online marketplaces created by the Affordable Care Act (ACA), popularly known as Obamacare. The company exited these online exchanges in 2017 due to financial losses and uncertainty around the Act under President Donald Trump. However, CVS has been studying the individual market for some time and believes that the market has stabilized. It announced its decision as President Biden told the U.S. Supreme Court last week that the ACA should be upheld and that his administration wants to bolsterer the health law and further expand its overage to more people.
In terms of forward p/e, CVS is currently trading at 9.98x, 62.5% below the industry average 26.63x. In terms of trailing-12-month p/s, CVS’s 0.37x is significantly lower than the industry average 9.04x.
In terms of trailing-12-month price/cash flow, CVS’s 6.51x is 70.6%, which is lower than the industry average 22.13x.
POWR Ratings Indicate Promising Prospects
CVS has an overall rating of B, which equates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. Among these categories, CVS has a Value Grade of A, which is consistent with the stock’s impressive valuation discussed here.
CVS has a B grade for Stability and Sentiment, which indicates that the stock is much less volatile than its peers and that it commands favorable analyst confidence. Of the six stocks in the C-rated Medical – Drug Stores industry, CVS is ranked #1.
Beyond what I stated above, we have also given CVS grades for Growth, Momentum, and Quality. Get all the CVS ratings here.
Over the past year, CVS has been clobbered by reduced foot traffic tied to the coronavirus pandemic, as well as increasing competition from online pharmacies. However, there are a few tailwinds in the near future that could allay these concerns. Instead of expanding horizontally, CVS has grown vertically with acquisitions and other organic strategies.
CVS has successfully launched several new healthcare services under its HealthHUB initiative to combat online competition. Its plans to open approximately 1,500 clinics to provide in-person medical, health and behavioral support services targeted to people with chronic diseases. Hence, in addition to the near-term vaccination boost, CVS has well-positioned to win customers over the long-run through this initiative and Obamacare with its consumer-focused strategy. The stock is currently trading at favorable valuations, and we believe it is a bargain.
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