CVS Health stock (NYSE: CVS) currently trades at $65 per share, 37% below its pre-inflation shock high of $102 seen in February 2022. In contrast, its peer – Walgreens stock – is down 78% over this period, amid falling profitability. The decline in CVS stock can also be attributed to its declining profitability, amid higher medical service costs for its Medicare business (Aetna). CVS, in August, cut its 2024 earnings outlook for a third consecutive quarter. For CVS, its medical benefit ratio, which refers to health care costs as a percentage of premium revenues, surged to 90% for the six months period ending June 2024, versus 85.4% in the prior-year period. Owing to the underperformance of its Medicare business, CVS announced the exit of Brian Kane, head of Aetna, and $2 billion in cost cuts. The company is considering strategic review options, including a spin-off of Aetna. [1] CVS acquired Aetna for $70 billion in 2017.
CVS stock was trading at $86 in June 2022, just before the Fed started increasing rates, and is now 24% below that level, compared to 50% gains for the S&P 500 during this period. The performance of CVS stock with respect to the index over the recent years has been quite volatile. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is much less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment around rate cuts and the uncertain geopolitical environment, could CVS face a similar situation as it did in 2023 and underperform the S&P over the next 12 months — or will it see a strong jump? Returning to the pre-inflation shock level of $102 means that CVS stock will have to gain 58% from here, and we don’t think this will materialize anytime soon. We estimate CVS Health’s Valuation to be $66 per share, close to its current market price. Our forecast is based on a 10x P/E multiple for CVS and expected earnings of $6.61 on a per-share and adjusted basis for the full year 2024. The 10x P/E ratio is slightly lower than the stock’s 11x average P/E ratio over the last three years. A slight decline in the valuation multiple makes sense in our view, given the fall in profitability.
Our detailed analysis of CVS Health’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.
2022 Inflation Shock
Timeline of Inflation Shock So Far:
- 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
- Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
- April 2021: Inflation rates cross 4% and increase rapidly.
- Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
- June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
- July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
- October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P 500 recoup some of its losses.
- August 2023 – August 2024: Fed has kept interest rates unchanged to quell fears of a recession and keep inflation in check
- September 2023: Fed cut rates by 50 bps and pointed to more rate cuts going forward
In contrast, here’s how CVS stock and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)
CVS and S&P 500 Performance During 2007-08 Crisis
CVS stock saw a 30% decline between October 2007 (pre-crisis peak) and March 2009 (as the markets bottomed out). It surged post the 2008 crisis to levels of around $23 in early 2010, rising about 28% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.
CVS Fundamentals And Financial Position
CVS Health’s revenue rose from $292 billion in 2021 to $363 billion in the last twelve months, led by increased prescription volume, pharmacy claims, and drug price inflation. However, the company’s operating margin fell from 5.2% in 2021 to 3.4% now, amid a rise in medical costs. Its TTM earnings per share of $5.62 compares with $5.95 in 2021.
Looking at the company’s financial position, CVS’ total debt rose from $76 billion in 2021 to $84 billion now, while its cash increased from $13 billion to $16 billion over this period. The company also garnered $8 billion in cash flows from operations in the last twelve months. CVS’ market capitalization stands around $79 billion and a debt levels of $84 billion implies a very high debt-to-equity ratio of around 106%. This indicates that the firm’s financial position is not robust.
Conclusion
With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe CVS stock is fairly priced at levels of around $65. If the company decides to split into two separate entities, it may unlock more shareholder value, and drive the stock price higher. Still, its large debt and high medical benefit ratio remains key risks in realizing any significant gains.
While CVS stock looks appropriately priced, it is helpful to see how CVS Health’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
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