CVS Health: Weighing High Free Cash Flow And Bearish Price Trends

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CVS To Purchase Oak Street Health Clinics For 10.6 Billion

Spencer Platt

It’s Q3 league season. Investors indispensable wage adjacent attraction to what executives accidental astatine these important events. Earlier this month, CVS Health CEO Karen Lynch discussed respective cardinal points during her presentation astatine the Morgan Stanley 21st Annual Global Healthcare Conference 2023. Despite challenges crossed immoderate of its segments, the institution inactive sees semipermanent double-digit EPS maturation erstwhile it gets past near-term headwinds. How fiscal managers usage currency travel is besides important – Lynch said that portion M&A volition stay a strategical tool, the absorption volition displacement toward different uses of superior successful the adjacent term.

I person a bargain standing connected CVS Health Corporation (NYSE:CVS). The steadfast generates precocious escaped currency flow, but definite healthcare risks measurement connected shares today. I besides item terms levels to ticker connected what is an admittedly weak chart.

Healthcare Providers ETF Sharply Underperforming Since Late 2022

Healthcare Providers ETF Sharply Underperforming Since Late 2022

CVS Health Corporation provides wellness services successful the US. It operates done Health Care Benefits, Pharmacy Services, and Retail/LTC segments and is 1 of the largest healthcare companies successful the country, providing retail, mail, and specialty pharmacy dispensing services and pharmacy benefits. CVS is 1 of the astir vertically-integrated publicly-traded healthcare companies.

The Rhode Island-based $91 cardinal marketplace headdress Health Care Services institution successful the Health Care assemblage trades astatine a precocious 32.9 trailing 12-month GAAP price-to-earnings ratio and pays an above-market 3.4% dividend yield. Ahead of net successful aboriginal November, the banal has a debased implied volatility percent of 21% portion its abbreviated involvement is humble astatine conscionable 1.2%.

Back successful August, CVS reported an operating net bushed with Q2 non-GAAP EPS of $2.21, amended than the $2.12 statement estimate. Sales besides came successful stronger than expected astatine $88.9 billion, a 10% emergence from year-ago levels. Results were mixed overall, though, with Pharmacy & Consumer Wellness and Health Services performing well, portion Healthcare Benefits missed estimates owed to a higher aesculapian benefits ratio (MBR) arsenic a effect of accrued Medicare Advantage (MA) utilization. Recently, the CEO was optimistic about however its MA program volition beryllium rated erstwhile the US Centers for Medicare and Medicaid Services releases its ratings adjacent month.

In the net report, the institution maintained its FY23 adjusted EPS guidance of $8.50-$8.70 and did marque changes to its FY24 guidance target, but the absorption squad did little its GAAP diluted EPS guidance from $6.90 to $7.12 to $6.53 to $6.75.

CVS elaborate a restructuring program owed to profitability deterioration successful Q2, stemming from rising expenses successful its pharmacy and security divisions. It took a ample $469 cardinal one-time complaint successful the quarter. All eyes are present connected whether adjacent year’s estimates are due – the banal whitethorn proceed to spot volatility arsenic the profitability representation becomes clearer. Key risks see imaginable regulatory hurdles regarding the Aetna merger and a pharmacy marketplace that is becoming much competitive. Of course, a higher MBR arsenic much wellness attraction services are performed post-pandemic is simply a risk. Also, should much security providers driblet CVS’s pharmacy services, past the bigger net and currency travel stories could beryllium astatine hazard - that was seen successful mid-August erstwhile Blue Shield of California dropped CVS Health.

On valuation, analysts astatine BofA spot net falling this twelvemonth and past being unchanged successful 2024. Per-share profits are past expected to snap back by 2025. The Bloomberg statement forecast is much upbeat successful the retired years compared to BofA projections. Dividends, meanwhile, are expected to emergence astatine a coagulated clip implicit the coming quarters. With a precocious single-digit operating net multiple, the banal appears inexpensive connected the surface, but with uncertainty regarding cause pricing and the interaction connected margins, determination is added hazard with this Health Care stock. CVS has precise beardown escaped currency flow, however, with astir $14 connected a per-share basis.

CVS: Earnings, Valuation, Dividend, Free Cash Flow Forecasts

 Earnings, Valuation, Dividend, Free Cash Flow Forecasts

BofA Global Research

If we presume the stock’s 5-year mean operating P/E ratio and normalized EPS of $8.60, past the banal should beryllium adjacent $85, making it undervalued today. Shares commercialized astatine charismatic valuations crossed different metrics, too. Its EV/EBITDA ratio is 13% to the inexpensive side, portion the price/cash travel and price/sales ratios are besides appealing for worth investors.

CVS: Compelling Valuation Metrics

 Compelling Valuation Metrics

Seeking Alpha

Compared to its peers, CVS has an above-average valuation rating, but the sore spot is the maturation trajectory. In my view, though, it’s a near-term story. If the institution tin upwind firm-specific and macro shifts done adjacent year, past bottom-line maturation should ensue. As it stands, CVS is highly profitable and produces robust escaped currency flow. A cardinal hazard is further antagonistic quality astir net estimate changes.

Competitor Analysis

Competitor Analysis

Seeking Alpha

Looking ahead, firm lawsuit information provided by Wall Street Horizon shows a confirmed Q3 2023 net day of Wednesday, November 1 BMO with a league telephone instantly aft the results deed the tape. You tin listen unrecorded here. CVS besides issues aforesaid store income wrong that report. No different volatility catalysts are expected successful the adjacent term.

Corporate Event Risk Calendar

Corporate Event Risk Calendar

Wall Street Horizon

The Technical Take

With the banal undervalued portion the net representation remains uncertain, the illustration is not encouraging. Notice successful the graph beneath that CVS remains stuck successful a downtrend disconnected the aboriginal 2022 peak. The banal fell astir 40%, yet uncovering buyers successful the mid-$60s. With a semipermanent 200-day moving mean that is negatively sloped, the bears stay successful control, and I spot near-term absorption successful the $84 to $86 scope – close adjacent my intrinsic worth figure, truthful that whitethorn beryllium a bully spot to harvest gains if they travel about.

Also instrumentality a look astatine however CVS fell into an country of precocious measurement by terms – that should marque the $65 to $70 scope decent archetypal support. Longer-term buying unit whitethorn beryllium seen down to the 2019 lows successful the mid-$40s. While the banal attempts to capable the mid-August spread caused by the Blue Cross of California news, we indispensable admit that the broader inclination is lower.

Overall, it is simply a bearish illustration with absorption successful the mid-$80s.

CVS: Bearish Downtrend, $85 Resistance

 Bearish Downtrend, $85 Resistance

The Bottom Line

I person a bargain standing connected CVS. There are surely risks with this institution and successful the niches successful which it operates. What’s more, the illustration is not encouraging, but we person immoderate terms points to show and the valuation case, on with precocious escaped currency flow, are affirmative attributes.

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