After almost a 20% decline in stock since the beginning of this year, we believe that CVS Health (NYSE: CVS) stock is likely oversold at the current price of $60 per share and it has a significant upside. The key is CVS Health’s stock is still 20% lower than it was at the beginning of 2019 and around 11% lower than it was at the start of 2018, a little over two years ago. Our dashboard, ‘What Factors Drove -16% Change In CVS Health Stock Between 2017 And Now?‘ provides the key numbers behind our thinking, and we explain more below.
Some of the stock price decline over the last two years can be attributed to the company’s massive $69 billion acquisition of Aetna, which resulted in $42 billion incremental debt between 2017 and 2019. The company did see revenue growth of 39%, led by the Aetna acquisition from 2017 to 2019. However, the company’s net income margin dropped 27.9% from 3.6% to 2.6% over the same period. This can be attributed to higher employee costs, financing costs, and goodwill impairments, partly offset by a decline in cost of goods sold. Given the Aetna acquisition, total share count also increased 27%. All these factors led to a 21% decline in EPS between 2017 and 2019. However, EPS is expected to grow in the coming years. The company in February guided for GAAP EPS to be in the range of $5.47 and $5.60 in 2020, compared to $5.08 in 2019.
A growth in CVS Health’s P/E multiple has partially mitigated the decline in the company’s earnings. CVS Health’s P/E multiple increased from 10.4x at the end of 2017 to 14.5x by the end of 2019. Moreover, CVS Health’s P/E is down to about 11.2x now, given the volatility of the current situation. This reflects a 7% growth in P/E multiple from December 2017 to March 2020. We believe there is a potential upside for CVS Health’s multiple when compared to levels seen over recent years – P/E of 14x at the end of 2019, and 11x currently.
How Is Coronavirus Impacting CVS Health’s Stock?
The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely impact CVS Health’s revenues, as it will see a low footfall at its stores. Also, CVS Health’s near term performance will be impacted due to its insurance business. The company is waiving cost-sharing for certain Aetna members, who are hospitalized for COVID-19 treatment. As such, CVS Health’s stock has lost 16% of its value between January 31st and April 8 (vs. about an 18% decline in the S&P 500). A bulk of the decline came after March 6th, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Matters were only made worse by fears of a price war in the oil industry triggered by an increase in oil production by Saudi Arabia. Notably, the company derives a bulk of its revenues from the US, which has become the new epicenter of the outbreak, with the country recording the largest numbers of COVID-19 cases across the globe.
On the positive side, CVS Health can look forward to a pickup in private health insurance with the coronavirus outbreak. The U.S. has already witnessed growth in the uninsured rate over the past few years. Total uninsured non-elderly population was nearly 30 million in 2018. With the current outbreak people may be willing to spend on health insurance for protection, and the uninsured rate could take a dip in the near term. Also, the retail pharmacy stores are open across the globe, while most of the other stores aren’t in the lockdown, given that access to medication is an essential.
Though near term impact from the current crisis is likely negative. We believe CVS Health’s Q1 results in May will confirm the trend in revenues. It is also likely to accompany lower full year guidance. However, if there are signs of abatement of the crisis by the time Q1 results are announced, the company’s stock could see a modest uptick. Going by historical trends, we believe that the company’s stock is currently oversold and offers potential upside returns.
Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.
Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.
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