CVS Health’s Stock Trades at Lower Valuations against Its Peers


Dec. 4 2020, Updated 10:53 a.m. ET

Analyzing the relative valuations for CVS Health and its cohorts

CVS Health’s (CVS) valuations have risen by 13.7% since the start of 2015[1. Through August 4]. Valuations have risen by 6.8% since June 15, when the proposed purchase of Target’s (TGT) pharmacies and clinics business was announced. Plus, with its access to new selling channels, CVS is likely to gain a valuable foothold from Target’s retail network in the Northwestern US through the deal.

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Growth focus

The company’s valuations have also benefited from its strategic focus on high-growth businesses like specialty pharmacy, in-store brands, and CVS/Minute Clinic. Revenue from its specialty pharmacy business was up by 28.4% in 2Q15. Smaller specialty pharmacy operator Diplomat Pharmacy (DPLO) grew sales over 49% to $808 million in its last quarter.

CVS/Minute Clinic sales were up 21% year-over-year in 2Q15. The company added 11 net new clinics in the quarter, taking the total to 997. The company has also been steadily growing its market share in the pharmacy business and is the largest integrated pharmacy chain in the US.

Profitability headwinds

CVS’ valuations are currently trailing peers Walgreens Boots Alliance (WBA), Diplomat Pharmacy (DPLO), and Rite Aid (RAD), as well as the overall industry (XLP), as discussed in the last article. That is partly as a result of the relatively greater exposure to its Pharmacy Benefit Management (or PBM) business. Plus, the PBM segment is growing faster than its Retail Pharmacy segment, which is likely to drag down the company’s overall margins in the future.

Historical earnings growth

The company’s earnings per share (or EPS) has grown at a CAGR[2. compounded annual growth rate] of over 10% over the past five years. Read about EPS growth rates expected this year in the next article.

CVS comprises ~0.7% part of the portfolio holdings in the Vanguard S&P 500 ETF (VOO).


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