CVS Health Corp (CVS, Financial) experienced a daily gain of 3.96%, with its Earnings Per Share (EPS) standing at $3.03. The question we aim to explore is, could CVS Health be modestly undervalued? This article provides a comprehensive valuation analysis to answer this question. We invite you to delve into the following exploration of CVS Health's financial metrics and business performance.
Company Overview
CVS Health Corp, with roots in retail pharmacy operations, offers a diverse range of healthcare services. Operating over 9,000 stores mainly in the U.S., CVS Health also stands as the largest pharmacy benefit manager, processing over 2 billion adjusted claims annually. The company's acquisition of Aetna has positioned it as a top-tier health insurer, serving approximately 24 million medical members. CVS Health's pending acquisition of Oak Street will further diversify its services by adding primary care, potentially creating significant synergies with its existing business lines.
As of August 2, 2023, CVS Health's stock price is $76.88, while its fair value, as estimated by the GF Value, stands at $103.61. This discrepancy suggests that CVS Health may be modestly undervalued. The following sections delve deeper into this valuation.
Understanding the GF Value
The GF Value is a proprietary metric that reflects a stock's intrinsic value. It's calculated based on historical trading multiples, a GuruFocus adjustment factor derived from the company's past performance and growth, and future business performance estimates. The GF Value Line represents the stock's ideal fair trading value.
Based on this method, CVS Health appears to be modestly undervalued. The GF Value estimates that the fair value of CVS Health's stock should be higher than its current price of $76.88 per share. This suggests that the long-term return of CVS Health's stock is likely to exceed its business growth, given its current undervalued status.
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Financial Strength
Before investing in a stock, it's crucial to assess the company's financial strength. Companies with poor financial strength pose a higher risk of permanent loss. Even though CVS Health's cash-to-debt ratio of 0.23 is lower than 100% of competitors in the Healthcare Plans industry, the company has a fair financial strength rank of 6 out of 10.
Profitability and Growth
Investing in profitable companies, especially those with consistent long-term profitability, is less risky. CVS Health has been profitable 9 out of the past 10 years, with an operating margin of 4.79%, ranking better than 60% of companies in the Healthcare Plans industry. This indicates a fair profitability rank of 7 out of 10.
Growth is a crucial factor in a company's valuation. CVS Health's 3-year average annual revenue growth rate is 7.4%, which lags behind 77.78% of companies in the Healthcare Plans industry. Its 3-year average EBITDA decline rate is 9.9%, ranking worse than 70.59% of its industry peers. This suggests room for improvement in CVS Health's growth performance.
Another measure of a company's profitability is the comparison between its return on invested capital (ROIC) and the weighted cost of capital (WACC). CVS Health's ROIC of 6.46 is higher than its WACC of 5.15, indicating efficient generation of cash flow relative to the capital invested in its business.
Conclusion
In summary, CVS Health appears to be modestly undervalued. The company's financial condition is fair, and its profitability is fair. However, its growth performance lags behind the majority of companies in the Healthcare Plans industry. For more insights into CVS Health's stock, review its 30-Year Financials here.
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