Shares of CVS Health Break Trend as Prices Fall to $88.25.

Drug Store company CVS Health fell to $88.25 today, marking a -10.5% change compared to the S&P 500 (-2.8% ). CVS is -26.81% below its average analyst target price of $120.57, which implies there is more upside for the stock. As such, the average analyst rates it at buy. Over the last year, CVS Health shares have outstripped the S&P 500 by 31.6%, with a price change of 16.8%.

Cvs health's trailing 12 month P/E ratio is 14.4, based on its trailing Eps of $6.14. The company has a forward P/E ratio of 9.7 according to its forward Eps of $9.06 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the healthcare sector has an average P/E ratio of 13.21, and the average for the S&P 500 is 15.97.

The problem with P/E ratios is that they don't take into account the expected growth in earnings of the stock. Sometimes elevated P/E ratios can be justified by equally elevated growth expectations. We can solve this inconsistency by dividing the company's trailing P/E ratio by its five year earnings growth estimate, which in this case gives us a 1.82 Price to Earnings Growth (PEG) ratio. Since the PEG ratio is greater than 1, the company's is overvalued in terms of its expected growth levels.

To understand a company's long term business prospects, we must consider its gross profit margins, which is the ratio of its gross profits to its revenues. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. After looking at its annual reports, we obtained the following information on CVS's margins:

  • 2021 gross margins: 17.5 %
  • 2020 gross margins: 18.0 %
  • 2019 gross margins: 17.4 %
  • 2018 gross margins: 15.9 %
  • Average gross margin: 17.2 %
  • Average gross margin growth rate: 3.3 %
  • Coefficient of variability (higher numbers indicating more instability): 5.2 %

We can see from the above that CVS Health business is not strong and its stock is likely not suitable for conservative investors.

To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in CVS Health's free cash flow, which was $15,745,000,000.00 as of its most recent annual report.

Over the last 4 years, the company's average free cash flow has been $11,598,000,000.00 and they've been growing at an average rate of 32.9%. With such strong cash flows, the company can not only re-invest in its business, it can afford to offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in CVS have received an annualized dividend yield of 2.1% on their capital.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Cvs health's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 1.5, but is still below the average P/B ratio of the Healthcare sector, which stood at 4.07 as of the third quarter of 2022.

Since it has an average P/E ratio, a lower P/B ratio than the sector average, and a steady stream of strong cash flows with an upwards trend, CVS Health is likely undervalued at today's prices. The company has mixed growth indicators because of an average PEG ratio and weak gross margins that are increasing. We hope you enjoyed this overview of CVS's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.

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The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.