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Is CVS Stock Too Cheap to Ignore?


Jun. 4 2019, Updated 7:05 a.m. ET


CVS Health (CVS) has fallen 18.5% on a YTD (year-to-date) basis as of June 3. Continued pressure on the company’s earnings from higher reimbursements, the increased generics dispensing rate, and price compression are dragging the stock down. Given the decline, CVS Health stock is trading at a multiyear low valuation.

As of June 3, CVS Health shares were trading at a forward PE ratio of 7.8x, which is ~45% lower than its five-year historical average of 14.3x. Walgreens Boots Alliance (WBA) stock is also trading at a significant discount compared to its historical average. Reimbursement pressure took a toll on the company’s share. Walgreens stock has fallen ~27% on a YTD basis.

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Factors to support CVS stock

CVS Health’s bottom line is expected to fall in the near term, which reflects higher reimbursement pressure. However, the company’s adjusted EPS is expected to stabilize in fiscal 2020. Analysts expect CVS Health’s adjusted earnings to mark a low to mid-single-digit decline in fiscal 2019. The decline reflects reimbursement pressure and a higher outstanding share count. However, the company’s EPS is projected to register mid-single-digit growth in fiscal 2020.

CVS Health’s top line will likely continue to grow at a stellar rate due to the Aetna acquisition and growth in prescription volumes.

With an expected mid-single-digit growth in the fiscal 2020 EPS and a current dividend yield of 3.7%, CVS stock looks attractive on the valuation front. However, near-term challenges could continue to hurt the company.


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