CVS Health recently reported its Q1 results, with revenues and earnings falling short of estimates. The company reported revenue of $88.4 billion and adjusted earnings of $1.31 per share, below expectations of $90 billion and $1.74, respectively. Additionally, CVS reduced its full-year guidance, disappointing investors. Despite lowering our price estimate for CVS by 18% following the results, it still remains above the current market price. In this analysis, we delve into CVS’ stock performance, key takeaways from its recent results, and its valuation.
Over the past few years, CVS stock has experienced a significant decline of 20% from early January 2021 to its current level of around $55. During the same period, the S&P 500 increased by approximately 35%. CVS stock returns have been inconsistent, with a 51% increase in 2021, followed by -10% in 2022, and -15% in 2023. In comparison, the S&P 500 returns were 27% in 2021, -19% in 2022, and 24% in 2023, indicating CVS underperformed the index in 2023.
While many individual stocks have struggled to outperform the S&P 500 in recent years, the Trefis High Quality Portfolio, consisting of 30 stocks, has consistently surpassed the benchmark index. This portfolio has provided better returns with less risk compared to the S&P 500, showcasing more stable performance metrics. Given the current macroeconomic environment with high oil prices and elevated interest rates, it remains uncertain whether CVS will underperform the S&P 500 over the next year or stage a recovery.
From a valuation perspective, CVS stock appears to have room for growth. Our valuation estimate for CVS Health is $72 per share, representing a potential upside of over 25% from its current price. This valuation is based on a 9x P/E multiple for CVS and anticipated earnings of $7.70 per share on an adjusted basis for the full year 2024. The 9x P/E ratio is slightly lower than the stock’s 10x average over the past five years.
In Q1, CVS Health reported revenue of $88.4 billion, a 4% increase year-over-year, driven by growth in Health Care Benefits and Pharmacy & Consumer Wellness segments. However, Health Services revenue declined by 10%. The company’s adjusted operating margin decreased by 180 basis points to 3.3%, primarily due to a 580 basis point rise in the medical benefit ratio to 90.4%. This led to an adjusted profit of $1.31 per share, a 40% decrease from the prior year.
Looking ahead, CVS has revised its earnings outlook for 2024, expecting earnings to be in the range of $7.00 to $8.30 per share on an adjusted basis, compared to $8.74 in 2023. The downward revision is attributed to higher anticipated medical costs. Despite facing challenges, CVS stock seems to have potential for growth. At its current levels, CVS is trading at 7x forward earnings, lower than the five-year average of 10x. While a slight decline in the valuation multiple may be justifiable, a multiple of 7x appears excessive.
While CVS stock shows promise for growth, it is essential to evaluate how CVS Health’s peers perform on key metrics. By conducting peer comparisons, investors can gain valuable insights into how CVS Health stacks up against other companies in the industry. Ultimately, CVS Health’s stock performance, recent results, and valuation suggest potential for growth, although challenges remain in the evolving macroeconomic environment.