CVS Health Corp (CVS) reported solid earnings for the first quarter, with revenues rising by 19% year-on-year. EPS from continuing operations, which excludes merger costs from the Omnicare and Target Corporation (TGT) pharmacies, was up by 4% to $1.18.
Moreover, despite lower guidance for Q2 with earnings expected to range between $1.28 and $1.31 per share, CVS stock guidance for the full year 2016 remains in the range of $5.73 to $5.88 per share.
Now, while Q1’s upbeat results are certainly good news, that’s merely the cherry on top. The real good news for CVS stock is that Bernie Sanders is almost certainly out of the presidential race. With his withdrawal, the chances of “BernieCare” becoming a reality dissipate.
Though both Democratic presidential nominees, Hillary Clinton and Bernie Sanders, favored capping medicine costs, the ideas orchestrated by Bernie Sanders would likely have had a much greater impact on a stock such as CVS.
At the heart of Berniecare was the idea that the Federal government should become a direct healthcare provider, similar to countries in Western Europe and Scandinavia. The practical meaning of such a mechanism would, of course, be cutting out the middle man and letting the Federal government market drugs directly to the public.
Such a scheme could have taken a big bite out of CVS stock’s market share. Furthermore, Berniecare would have undermined CVS core strategy — growth through mergers, then leveraging it to negotiate better deals with drug makers.
CVS Stock: Value Unleashed
Now that the risk of Berniecare has faded, CVS stock’s future seems much brighter and benefits from the mergers with Omnicare and the Target pharmacy business, CVS stock can, once again, be valued by its intrinsic worth.
Baby boomers continue to age, and with that growing demographic, demand for drugs marketed by CVS will rise. That will result in healthy growth for the company.
CVS stock revenues are already growing at a healthy clip, on average 10% per year over the past five years, and gross margins are reasonable at 17%. With the Omnicare and Target deal starting to have an impact, both the growth rate and margins are set to improve significantly.
And yet there is a mismatch between CVS stock’s promising outlook and its current valuation. CVS stock trades at a price to sales ratio of merely 0.7, compared with the S&P 500 average price to sales ratio of 1.8. Clearly, CVS stock’s current valuation suggests that its growth potential is not even close to being priced in.
As this massive demographic trend continues to unfold and as CVS margins and growth continues to brighten, plus with Berniecare now no longer a threat, CVS stock could unleash its potential and ride much higher.
As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.
