Should You Buy CVS Health Stock At $70?

We believe that CVS Health stock (NYSE: CVS) is a good buying opportunity at the present time. CVS stock trades near $70 currently and it is, in fact, down 6% from its pre-Covid high of $74 in February 2020 – just before the coronavirus pandemic hit the world. CVS stock has rallied over 32% since its March lows of $53, compared to a 63% gains for S&P 500. The underperformance can largely be attributed to the e-commerce giant Amazon entering into the pharmacy business, resulting in an increased competition going forward. The company’s overall Q2 and Q3 performance was better than street estimates, and now with economies opening up, the company will likely see improved sales growth with an expected increase in total prescription volume, driving the stock higher from here, in our view. Our conclusion is based on our comparative analysis of CVS Health stock performance during the current financial crisis with that during the 2008 recession in our interactive dashboard.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 63% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how CVS stock and the broader market fared during the 2007-08 crisis

Timeline of 2007-08 Crisis

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  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

CVS and S&P 500 Performance Over 2007-08 Financial Crisis

CVS stock declined from levels of about $37 in September 2007 (pre-crisis peak) to levels of $26 in March 2009 (as the markets bottomed out), implying CVS stock lost 31%. It recovered post the 2008 crisis, rallying 25% to levels of $32 by January 2010. In comparison, the S&P 500 Index saw a decline of 51% from its peak in September 2007 to its bottom in March 2009, followed by a sharp recovery of 48% by January 2010.

CVS Health Company Fundamentals Over Recent Years Have Been Strong

CVS Health’s revenues increased from $177 billion in 2016 to $257 billion in 2019, primarily due to the impact of the Aetna AET acquisition, along with steady growth in prescription volume and average billing. The company has also seen its Net Margins expand from 2.7% to 3.1% on an adjusted basis, aiding its EPS, which grew from $5.05 to $7.08 over the same period. More recently, CVS Health garnered over $199 billion in total revenue, reflecting 4.9% growth y-o-y in the first 3 quarters of 2020. The growth is partly aided by an increase in overall unemployment due to the pandemic, implying an increased number of government sponsored insurance enrollments for CVS Health. Looking at the bottom line, the company reported adjusted EPS of $6.21, reflecting 16% y-o-y growth. The EPS growth has been higher than revenues given margin expansion, as deferment of elective surgeries earlier in the year resulted in a temporary decline from 83.7% to 78.9% in the company’s MBR ratio (medicals costs as a percentage of premiums). The MBR ratio will likely trend higher over the coming quarters with the resumption of elective surgeries.

Does CVS Health Have Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

CVS Health’s total debt increased from $27 billion in 2016 to $67 billion at the end of Q3 2020 (primarily due to the Aetna acquisition), while its total cash increased from $3.5 billion to $12.1 billion over the same period. CVS Health generated $12 billion cash from operations in the first nine months of 2020. While the company’s debt levels are high, the company has enough liquidity cushion to weather the current crisis.

Conclusion

Phases of Covid-19 Crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-October 2020: After poor Q2 results, Q3 expectations were lukewarm, but continued improvement in demand, and progress with vaccine development buoyed market sentiment

As the global economy opens up and lockdowns are lifted in phases, consumer demand is expected to pick up. This could be reflected in the form of a pick-up in prescription volume and total revenues toward the end of 2020, followed by continued revenue growth in 2021, boding well for CVS stock in the near term. While CVS stock has 6% upside for it to recover to pre-Covid highs, we believe the stock could trend much higher than that in the near term.

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