CVS Looks Like Good Value Here for Most Investors

Stocks to buy

CVS Health (NYSE:CVS) is a $97 billion market cap health care stock that has done very well over the last year. For example, CVS stock is up over 30% in the last year and is also up 9.5% so year-to-date, as of midday April 4 ($74.48 per share). In the last month alone, the stock is up over 5.8%.

Source: Susan Montgomery / Shutterstock.com

I estimate that the stock is worth at least 7.86% more at $80.34. This is based on a comparison of some basic value metrics with a set of four of its peers. More on this below.

CVS has over 9,900 retail drug stores and 1,100 walk-in MinuteClinic locations. To put it succinctly, CVS Health has thrived during the coronavirus crisis in the U.S.

For example, CVS Health’s revenue was up 4.3% to $268.7 billion in 2020. Moreover, its diluted continuing earnings per share (EPS) was up 7.67%.

This is a very strong company. Despite the pandemic, people are shopping at CVS more.

This is due in part to CVS Health’s late 2018 acquisition of Aetna, a giant health insurance company. In fact, CVS CEO Larry Merlo said one purpose of the deal was to increase “personal contacts and deeper collaboration with their primary care physicians.”

So it looks like the insurance company acquisition is now really working for CVS Health.

Attractive Valuation Metrics

CVS stock is cheap at just 9.9 times expected earnings and a 2.7% dividend yield. This can be seen, along with other metrics in the chart on the right.

Moreover, the company is a very powerful free cash flow (FCF) producer. In the last 12 months (LTM) the company generated $13.4 billion in FCF, including its capital expenditures.

Compared to its $97 billion market capitalization, CVS stock has a very high 13.8% FCF yield. (This is seen by dividing its $13.4 billion FCF by the $97.3 billion market value.)

Therefore, this implies that CVS stock is now worth $108.56 per share, or 46% higher. This is calculated by taking CVS’s FCF of $13.428 billion and dividing it by 9.4%, the median of its peers.

You can see the value metrics of CVS’s peers in the table I’ve prepared above. In fact, CVS has similar characteristics as the peer median, except that it has a lower dividend yield and higher FCF yield.

Therefore, if we were to calculate the price target for CVS using each of these metrics, we derive a price target of $80.34 per share. You can see that in the table below.

For example, taking CVS’s dividend per share of $2.00 and dividing it by the median 3.2% yield, the price target is lower at $62.76. However, that assumes that CVS does not increase its dividend which it is likely to do. The average of all four of these metrics implies that CVS stock is worth about 7.8% more.

What To Do With CVS Stock

I am not the only analyst who believes that CVS is undervalued. In fact, if anything, I am too conservative. For example, TipRanks.com indicates that 14 analysts have written up CVS stock in the last 3 months. Their price targets on average indicate CVS stock is worth $89.30, or 20% higher than today.

The same is true for Marketbeat, another aggregate site analyzing Wall Street reports. The state that the consensus target price among 16 analysts for CVS is $82.08, or 10% above today’s price. Similarly, Yahoo! Finance reports that 24 analysts believe that the stock is worth $86.09, or 15.6% above today’s price. The average of all three of these aggregation sites is $85.82, or 15.2% higher.

Therefore, take my lowball estimate of $80.34 with a grain of salt. Most other analysts think it is worth $85.82. Either way, CVS stock looks like good value here for most investors.

On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.