CVS Health Corp (NYSE:CVS) reported Q1 earnings, the shares are back to where they started, despite a bit of a roller-coaster ride. But what are investors to make of CVS stock after April’s 12% gain?
The Woonsocket, Rhode Island-based healthcare services company beat earnings estimates but missed on revenue. However, even with the mixed results in Q1, they expect 2018 earnings to surpass previous estimates.
But wait, there’s more. With its pending acquisition of Aetna, CVS starts a new chapter (maybe a whole book). With pharmacies and insurance now under one umbrella, CVS finds itself involved in customer healthcare at all levels. This structural change, while costly, will make CVS stock more profitable and more valuable.
CVS stock beat on earnings, missed on revenue
CVS earnings per share (EPS) for Q1 came in at $1.48, 7 cents ahead of expectations. The company earned $1.17 a share in the same quarter last year. Revenue of $45.7 billion grew by 2.7% from last year’s levels. Unfortunately, it also missed estimates by $90 million.
Earnings guidance for 2018 offered better news. The company expects to earn between $6.87 and $7.08 per share this year. Analysts had previously expected a consensus level of $6.47.
Our own Bret Kenwell recommended buying CVS stock going into earnings. It appears his prediction is proving correct. With the shares trading below $63, they have a forward price-to-earnings ratio of less than 9 if we assume a $7 per share profit for 2018. For comparison, the S&P 500 Index multiple is at 16.9, according to Morningstar data.
That also compares well to its retail archrival Walgreens Boots Alliance Inc (NASDAQ:WBA). It performs even better versus Rite Aid Corporation (NYSE:RAD) which will soon exist under the umbrella of privately held Albertsons Companies LLC.
Aetna Tie-Up Will Boost CVS Stock
However, the real gamechanger involves plans to acquire Aetna Inc (NYSE:AET). With that addition, CVS becomes much more than a pharmacy group. The combination will allow customers to receive care and pick up prescriptions at the same store. This allows CVS to compete with Express Scripts Holding Co (NASDAQ:ESRX), which is working to merge with CIGNA Corporation (NYSE:CI) in a venture similar to the CVS-Aetna merger. Assuming the Justice Department approves such a union, CVS would also go toe-to-toe with the likes of UnitedHealth Group Inc (NYSE:UNH) and Humana Inc (NYSE:HUM). From a valuation standpoint, both of these companies trade at higher PE ratios.
Moreover, insurance companies tend to see higher profit growth than pharmacies. Analysts forecast double-digit profit growth for CVS stock in two of the next three years. All of these factors make it likely the multiple will increase well above the level it sees today. Even if the Aetna merger fails to gain approval, this still means the market is likely valuing CVS too low.
CVS Stock Offers Low Price, High Dividend Yield
CVS stock is also on a resurgence. As recently as three years ago, CVS shares traded as high as $106.90 a piece. At the approximate $63 per share levels of today, this trades at a substantial discount. Taking it back to the $107 per share and beyond would still leave CVS stock at a fair valuation.
Furthermore, the dividend yield at 3.2% is the highest level in recent memory. The company has increased its dividend every year since 2004. Its last bump in 2017 took the annual dividend to $2.00 per share. Assuming CVS wants to become a “dividend aristocrat” — meaning 25+ years of annual dividend increases — the increases should come soon. However, this past January was the first January since 2008 to not see a dividend increase. The company cited the cost of the Aetna acquisition as the reason. Still, they will have to act soon if they want the aristocrat distinction.
Bottom Line on CVS Stock
CVS stock beats earnings as it continues its transition to a full-scale healthcare services provider. The company beat estimates but fell slightly short on revenues in Q1. However, it made an impression on Wall Street by taking 2018 earnings guidance much higher than analysts had predicted.
Now, as it continues to move ahead on its Aetna purchase, CVS trades at a decades-low PE and enjoys dividend yields near record highs. With a low valuation and a company transformation taking place, the future continues to look brighter for CVS stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.