Healthcare company CVS Health is taking Wall Street by surprise today, falling to $91.51 and marking a -3.5% change compared to the S&P 500, which moved 0.8%. CVS is -22.7% below its average analyst target price of $118.39, 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 24.3%, with a price change of 7.3%.
CVS Health Corporation provides health services in the United States. The company is categorized within the healthcare sector. The catalysts that drive valuations in this sector are complex. From demographics, regulations, scientific breakthroughs, to the emergence of new diseases, healthcare companies see their prices swing on the basis of a variety of factors.
CVS Health's trailing 12 month P/E ratio is 14.9, based on its trailing Eps of $6.14. The company has a forward P/E ratio of 10.1 according to its forward Eps of $9.07 -- 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.
It’s important to put the P/E ratio into context by dividing it by the company’s projected five-year growth rate. This results in the Price to Earnings Growth, or PEG ratio. Companies with comparatively high P/E ratios may still have a reasonable PEG ratio if their expected growth is strong. On the other hand, a company with low P/E ratios may not be of value to investors if it has low projected growth.
CVS Health's PEG ratio of 1.82 indicates that its P/E ratio is fair compared to its projected earnings growth. Insofar as its projected earnings growth rate turns out to be true, the company is probably fairly valued by this metric.
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.
Companies have many costs that arise independently from their core business: cost of maintaining debt, rent payments, capital expenditures, depreciation, etc. When all of these separate cash flows are taken into account, we are left with the company's free cash flow, which for CVS Health was $15,745,000,000.00 as of its last 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 2.2% on their capital.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Cvs health's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 1.6, 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.
Thanks for reading! Don't forget to subscribe to our free newsletter!