CVS Health Corp (NYSE:CVS) has not performed all that well. Shares are down 15% over the past year and 30% over the past three years. However, because of these declines, CVS Health stock has become more attractive. Should we step in and buy CVS stock ahead of its May 2nd earnings? I think so. Here’s why:
Valuation and Growth
While CVS isn’t primed for robust growth in the coming years, it’s set to grow nonetheless. Analysts are looking for 2.3% growth this year and an acceleration to 4.2% growth in 2019. On the earnings front, estimates call for modest growth of 5.4% and 7.7% this year and next.
For this, we’re paying just 11.2 times this year’s earnings estimates and 10.4 times 2019 estimates. These types of valuations are typically reserved for companies with little to no growth. In some cases, negative growth companies amid a turnaround can sport a similar valuation. But there’s really nothing wrong with mid-single-digit growth in sales and earnings over the next few years.
There’s two other things worth pointing out as well. The first, margins. In both years, analysts expect earnings growth to outpace revenue growth. That bodes well for gross margins. Second, analysts expect both earnings and revenue growth to accelerate in 2019 vs. 2018.
One last note? These estimates could prove conservative. CVS hasn’t missed an earnings estimate since 2014. Meaning that it very well could earn more than expected in 2018 and 2019, making its valuation more attractive.
The Dividend
When it comes to the dividend, some investors might make a case for a stock’s historical yield support. What’s that? It’s the level where a stock like CVS typically finds support when its dividend yield reaches a certain level. The only problem with using this argument for CVS stock at this point? It yields 3%, a payout it hasn’t neared in 20 years!
So while we can’t make an argument for CVS based on yield support, we can argue that it’s an attractive payout. CVS stock should attract income hunters near this level, as it pays out more than a 10-year Treasury note. In combination with modest growth and a low valuation, CVS Health stock is looking more and more attractive.
Trading CVS Stock
Does CVS Health stock have a great looking chart? Not at all. It’s been in a steady downtrend for almost three years. Should it fail to push through downtrend resistance near $77.50, that downward channel will likely continue.
On the plus side, shares have been exploding off the $60 level, which could prove to be a good entry for bulls should CVS stock pullback in the future. If earnings are ill-received this week, I would consider buying shares near this level for a measured risk/reward entry.
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The average price target for CVS stock sits all the way up $87.44, implying a whopping 25% upside to current levels. Remember, that’s the average price target. The highest price target on Wall Street sits all the way up at $98, implying more than 40% upside to the stock.
Heck, the lowest Wall Street price target sits in the $70s, meaning that even the least optimistic analyst is more bullish on CVS than the market at this point.
The bottom line is simple: CVS Health stock has decent growth, a low valuation and a big dividend yield. Some investors will feel comfortable piling into it for these reasons alone.
Investors with a larger focus on the technicals instead of the fundamentals will want to watch for a breakout or a pullback. Despite it requiring a large move in either direction, it will give buyers a more measured risk/reward entry.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
