CVS Health Stock: What’s Fueling Growth and Will the Uptrend Last?

  • CVS Health stock is up about 13% so far in November.
  • Strong financial performance is driving CVS Health stock higher.
  • Low earnings growth could limit further upside in CVS Health stock.

CVS Health stock performance

Shares of CVS Health (CVS) have recovered sharply. CVS Health stock rose by about 40% in the last three months. Meanwhile, it is up about 13% so far in November. The recovery in CVS Health stock is due to the company’s stellar financial performance in the first three quarters of 2019.

Moreover, the company raised its full-year operating income and earnings outlook, which further supported the upside.

CVS Health stock is up 14.5% year-to-date on November 27. In comparison, shares of Walgreen Boots Alliance (WBA) are down about 12%. Meanwhile, the S&P 500 rose by about 26%.

CVS stock is trading about 8% lower than its 52-week high of $81.45. Meanwhile, it’s trading about 45% above its 52-week low of $51.72.

CVS growth catalysts

As noted above, the rapid rise in CVS stock is due to the company’s robust financial performance. For instance, CVS Health’s revenues have grown at a breakneck pace in the last three consecutive quarters. Moreover, CVS Health’s revenues exceeded Wall Street’s expectations in the past three quarters.

Notably, CVS Health has a long streak of beating Wall Street’s earnings estimates. CVS Health’s better-than-expected bottom-line performance comes amid increased reimbursement pressure on margins and higher outstanding share count. Given these issues, CVS Health’s performance is commendable.

In the first three quarters of 2019, CVS Health has exceeded analysts’ EPS estimate by a wide margin. During the last reported quarter, CVS posted adjusted earnings of $1.84 per share, which handily beat analysts’ consensus estimate of $1.77.

Notably, CVS Health has beat analysts’ expectations by an average of 8% in the last three quarters.

Further, CVS Health increased its 2019 adjusted EPS from $6.89–$7.00 to $6.97–$7.05. The new guidance was higher than Wall Street’s expectation of $6.98.

CVS stock outlook

While we are impressed with CVS Health’s recent financial performance, the expected moderation in growth could limit the upside in the stock.

CVS Health’s top line got a big boost from its Aetna acquisition. For instance, CVS Health’s top line increased by more than 35% in the first nine months of 2019, with Aetna contributing most of this growth.

During the last reported quarter, CVS Health’s revenues rose 37.1%. This growth reflects incremental sales from its Aetna acquisition. Moreover, higher prescription volumes and branded drug inflation further support top-line growth.

However, CVS will annualize its Aetna acquisition. This is likely to result in a sharp deceleration in the sales growth rate. For instance, analysts expect CVS Health’s top line to increase by 17% in the fourth quarter, reflecting a sharp moderation in the growth rate. Moreover, the sales growth rate is likely to come down to low-single-digits in 2020.

Further, analysts expect CVS Health’s adjusted EPS to mark a double-digit decline in the fourth quarter. Reimbursement pressure and higher outstanding share count are also likely to pressure its bottom line. Furthermore, analysts’ estimates indicate that CVS Health’s bottom-line growth is expected to remain subdued in 2020.

Softness in sales and earnings growth is likely to restrict the uptrend in CVS stock.

Analysts have a target price of $78.39 on CVS Health stock, which implies an upside of 4.5% based on its closing price of $75.04 on November 27.