Shouldn't CVS Health's Shares be Regarded as an Underappreciated Investment Opportunity?
Shouldn't CVS Health's Shares be Regarded as an Underappreciated Investment Opportunity?
CVS Corporation's shares, associated with healthcare giant CVS Health, have experienced a significant drop this year. The company hasn't pleased investors with its financial performance and has repeatedly reduced its forecasts. Furthermore, a new CEO, David Joyner, has recently taken charge.
Despite the grim outlook, the stock's current oversold state and low trading prices could imply a potential value investment opportunity, provided one is prepared for long-term commitment. Is investing in CVS stock a worthwhile risk?
Challenges facing CVS Health
So far this year, CVS Health's shares have fallen by 32%, bringing the stock to levels last seen in 2019.
The corporation is grappling with escalating medical expenses for patients under its Aetna health insurance division. The medical benefits ratio (MBR), a crucial indicator, highlights the ratio between healthcare expenditure and collected premiums. As of the quarter ending in September, this ratio stood at 95.2%, significantly higher compared to the 85.7% reported in the previous quarter.
CVS is also undergoing an extensive restructuring plan aimed at reducing costs and boosting efficiency. Although quarterly sales grew by over 6%, the adjusted operating income decreased by 43%, primarily due to increased medical expenses and restructuring charges. As part of its efforts to streamline operations, CVS plans to close hundreds of pharmacy retail locations.
Competition intensifies from online retail giant Amazon, which recently unveiled its intention to offer same-day prescription delivery to nearly half of the US by the end of 2023. This move could potentially reduce the need for individuals to visit their local pharmacy, be it CVS or another service provider.
CVS faces an uncertain and challenging path ahead. With a new leader, David Joyner, leading the charge, the company needs to demonstrate its ability to improve its MBR and increase overall profits while remaining competitive against Amazon's growing healthcare initiatives.
CVS will not provide 2025 guidance until next year, when the new CEO has had sufficient time to analyze the company's situation.
CVS is affordable -- but are its multiples still meaningful?
If a company's earnings frequently underperform and guidance is continually adjusted, estimating the genuine value of the business becomes more challenging. For example, CVS's forward P/E ratio of 7 may suggest an attractively priced stock, but such projections are based on assumptions about future profitability, which have proven difficult to accurately predict in the current circumstances.
Additionally, CVS's price-to-book ratio of 0.9 may not fairly represent value if the company incurs impairment charges as a result of unfavorable industry dynamics. The company's dire situation has prompted a strategic review, which may involve the dismantling of its business model, encompassing pharmacy retail operations, health insurance, and pharmacy benefits management.
Should the business be divested, various implications for its competitiveness and asset value would emerge, potentially affecting the overall worth of its assets.
Is CVS Health a worthy investment opportunity today?
At its current discounted price, CVS has the potential to be an undervalued entry. However, for this to be the case, management must demonstrate its grip on the situation and provide convincing evidence of its ability to lower the MBR, enhance overall margins, and remain competitive as Amazon expands its healthcare portfolio.
At present, it remains challenging to discern the direction CVS is likely to take in the subsequent years. While its stock price is undeniably low, investors ought to demand a discount for the healthcare sector, considering the uncertainty it faces. Those with a high appetite for risk and willingness to take a chance on CVS could consider it as a contrarian investment. However, most investors may well opt for safer investments or wait until the new CEO demonstrates effective leadership next year before making a decision.
Given the company's financial challenges, some investors might be contemplating whether to invest in CVS stock to capitalize on potential future improvements. Despite the company's reduced earnings and increased medical expenses, a value investor might see this as an opportunity to invest in CVS's shares at a lower price, with the expectation of higher returns in the long term.
The uncertainty surrounding CVS's future, coupled with their aggressive restructuring plan and looming competition from Amazon, necessitates meticulous financial analysis and risk assessment before making an investing decision.