CVS Health Corp (CVS, Financial) has recently seen a daily loss of 0.94%, with a 3-month gain of 2.96%. The company's Earnings Per Share (EPS) stands at 2.28. With these figures in mind, is CVS Health significantly undervalued? In this article, we delve into a detailed valuation analysis of CVS Health, providing value investors with insightful information to make informed decisions.
Company Overview
CVS Health Corp (CVS, Financial) is a leading healthcare company, offering a diverse set of services. Its roots are in retail pharmacy operations, with over 9,000 stores primarily in the U.S. CVS Health is also the largest pharmacy benefit manager, processing over 2 billion adjusted claims annually. Additionally, it operates a top-tier health insurer, serving about 26 million medical members. CVS Health's recent acquisition of Oak Street adds primary care services to the mix, offering significant synergies with all its existing business lines.
At the current price of $70.66 per share, CVS Health has a market cap of $90.80 billion. However, its fair value, as estimated by the GuruFocus proprietary valuation method, stands at $105.92 per share, suggesting that the stock may be significantly undervalued.
Understanding the GF Value
The GF Value is a proprietary measure that estimates the current intrinsic value of a stock. It is calculated based on historical trading multiples, a GuruFocus adjustment factor based on the company's past returns and growth, and future business performance estimates. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at.
If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher. Given CVS Health's current price and the GF Value, the stock appears to be significantly undervalued.
Because CVS Health is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth.
Financial Strength
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company.
CVS Health has a cash-to-debt ratio of 0.21, which is worse than 100% of 19 companies in the Healthcare Plans industry. GuruFocus ranks the overall financial strength of CVS Health at 6 out of 10, which indicates that the financial strength of CVS Health is fair.
Profitability and Growth
Investing in profitable companies poses less risk, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. CVS Health has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $339.20 billion and Earnings Per Share (EPS) of $2.28. Its operating margin is 4.43%, which ranks better than 53.33% of 15 companies in the Healthcare Plans industry. Overall, GuruFocus ranks the profitability of CVS Health at 7 out of 10, which indicates fair profitability.
Growth is probably the most important factor in the valuation of a company. A faster-growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of CVS Health is 7.4%, which ranks worse than 77.78% of 18 companies in the Healthcare Plans industry. The 3-year average EBITDA growth rate is -9.9%, which ranks worse than 70.59% of 17 companies in the Healthcare Plans industry.
ROIC vs WACC
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, CVS Health's return on invested capital is 6.05, and its cost of capital is 5.77.
Conclusion
In conclusion, the stock of CVS Health Corp (CVS, Financial) appears to be significantly undervalued. The company's financial condition is fair, and its profitability is also fair. However, its growth ranks worse than 70.59% of 17 companies in the Healthcare Plans industry. For a more detailed financial overview of CVS Health, check out its 30-Year Financials here.
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