CVS Healthcare (NYSE: CVS) has been caught up in a few controversies over the past month. CVS was recently sued by the New York Attorney General for allegedly violating antitrust laws. Additionally, laxatives sold by the company have been recalled after suspected product contamination. This culmination of bad news and other factors has had a negative effect on the company’s stock price, as it is currently down -10.31% over the past six months. Still, some investors are stocking up on CVS in hopes that it will climb in the coming years. In this article, we’ll look at some of the reasons why, as well as the downsides of adding it to your portfolio.
Bad expected growth rate
First, let’s start with the weaknesses of CVS. The company struggles to grow revenue on a year-over-year and forward-looking basis, and its numbers don’t compare attractively to peers in the same industry sector. CVS’s year-over-year revenue growth is 10.61%, while the sector climbs to 17.07%. The company’s FWD revenue growth expectations are even bleaker at 6.26% vs. 14.80%.
In addition to failing to grow its top line competitively, it is also struggling to grow some of its earnings metrics such as EBITDA despite strong margins. CVS FWD EBITDA growth is 4.72%, while the industry leads with 10.78%. This may be disappointing as its net profit margin is 2.68%, while the industry struggles with this metric at -1.87%.
Revisions and momentum are on CVS’s side
The other side of the argument is that CVS has received many positive reviews for its EPS and revenue targets over the past three months. The company earned 22 positive EPS reviews and 17 positive earnings reviews. Overall, Wall St considers CVS a buy judging by its ratings. 10 analysts gave the stock a strong buy and 8 gave it a buy rating. The rest rated the stock as a reserve, while no analyst gave it a strong sell or sell rating.
For more momentum-prone investors, CVS might be worth a look. CVS outperforms its peers in the same industry in price performance. It beats the sector by 45.85% over 9 months and 49.66% over 12 months. Compared to the S&P 500, the company’s earnings beat the market over a longer period. The CVS returned 72% over three years, while the S&P 500 returned 34.59%. Over ten years, however, the company underperformed, with 112.57% compared to the index’s return of 193.83%.
CVS vs. Walgreens Boots Alliance Inc.
Wallgreens Boots Alliance Inc. (NASDAQ: WBA) makes an interesting comparison with CVS. The market capitalization of WBA is significantly lower than that of CVS with 33.90 billion against 125.72 billion. The losses for WBA have been greater since the beginning of the year with -23.62% against 5.87% for CVS. Additionally, the stock’s long-term return is also discounted, as over 10 years, WBA returned 43.13% while CVS returned 166.34%.
In terms of dividends, CVS is stronger, but WBA’s dividend is growing faster. CVS dividend rate and yield are $2.15 and 2.24%. The same stats for WBA are $1.92 and 3.65%. As a measure of dividend growth rate on a 5-year basis, WBA’s CAGR is 4.95%, while CVS is at 2.24. This may be partly due to the fact that WBA has had seven consecutive years of dividend growth while CVS has only one.
For valuation, WBA is the clear winner with a FWD P/E ratio of 6.45 compared to CVS’s FWD P/E of 13.68. WBA is also cheaper on a Price/Sales basis with a ratio of 0.25 to 0.42.
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