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CVS Health (CVS) Hits a 52-Week High: What's Driving It?

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CVS Health Corporation (CVS - Free Report) reached a new 52-week high of $107.61 on Jan 27, before closing the session marginally lower at $106.79.

The company’s shares have charted a solid trajectory in recent times, appreciating 49.1% over the past year, ahead of the 28.7% rise of the industry it belongs to and 17.5% surge of the S&P 500 composite.

Over the past five years, the company registered earnings growth of 8.1%, ahead of the industry’s 6.1% rise and the S&P 500’s 2.8% increase. The company’s long-term expected growth rate of 7.8% compares with the industry’s growth projection of 6.1% and the S&P 500’s estimated 11.7% increase.

CVS Health has been registering robust growth across three of its operating segments. The company’s retail/long term care (LTC) business witnessed a substantial recovery in front store sales, raising investors’ confidence. Strong potential in the specialty pharmacy space also instills optimism. A good solvency position is another plus.

 

Zacks Investment ResearchImage Source: Zacks Investment Research

 

Let’s delve deeper.

Key Drivers

Segmental Growth: The market is upbeat about enhanced third-quarter revenues across three of CVS Health’s operating segments. Within pharmacy services, growth outperformed the company’s expectations, delivering 9.3% revenue growth and strong operating income growth. The retail/LTC segment reported above-market growth and exceeded the company’s expectations with 10% revenue growth. Meanwhile, in the health care benefits arm, CVS Health registered 9.5% revenue growth, strongly driven by growth in the government business.

Retail on a Growth Track: Over the last few quarters, CVS Health’s retail/LTC business has been registering revenue growth after several quarters of a drag. In the third quarter, the segment’s pharmacy sales and prescriptions filled increased 8% year over year, largely driven by COVID-19 vaccine administration and core pharmacy services. The company also witnessed a solid rebound in front store sales on strength across all categories, with health and wellness products driving nearly two-thirds of growth. The company’s patient satisfaction scores remained high, with nearly 90% satisfied with their experience in CVS Health locations.

Specialty Pharmacy – A High-Growth Avenue: The soaring demand for specialty pharmacy, especially in the ongoing decade, is likely to accelerate growth for CVS Health. In the third quarter, specialty pharmacy revenues increased 8.7%, reflecting integrated offering with in-store, mail order and specialty services growth. The company also saw continued growth within specialty pharmacy capabilities. Furthermore, CVS Health’s investments in high-growth areas of specialty pharmacy, adding businesses such as Coram and Novologix, raise our optimism.

Strong Solvency: CVS Health ended the third quarter with cash and cash equivalents of $9.8 billion compared with $10.13 billion at the end of the second quarter. Total debt came up to $58.39 billion, much higher than the corresponding cash and cash equivalent level. Yet, the near-term payable debt of $1.5 million is significantly lower than the short-term cash level, indicating good news in terms of the company’s solvency level. The company is holding sufficient cash for debt repayment, at least for the year of economic downturn.

Downsides

A host of factors have been deterring CVS Health’s rally of late.

The ongoing difficult pharmaceutical reimbursement scenario in the pharmacy services and retail/LTC segments, and escalating drug prices are hampering the demand for CVS Health’s offerings. Further, the company is faced with stiff competition, especially in the pharmacy segment, as other retail businesses continue to add pharmacy departments and low-cost pharmacy options become available.

Zacks Rank and Key Picks

Currently, CVS Health carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the broader medical space are Baxter International Inc. (BAX - Free Report) , Hologic, Inc. (HOLX - Free Report) and Cerner Corporation (CERN - Free Report) .

Baxter, currently carrying a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 9.5%. Baxter’s earnings surpassed estimates in the trailing four quarters, delivering a surprise of 10.2%, on average. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Baxter has outperformed the industry over the past year. BAX has gained 9.7% against a 17.4% decline of the industry in the said period.

Hologic, carrying a Zacks Rank #2 at present, has a long-term earnings growth rate of 7.4%. HOLX surpassed earnings estimates in three of the trailing four quarters and missed in another occasion, delivering an average surprise of 29.2%.

Hologic has declined 10.1% compared with the industry’s 13% drop over the past year.

Cerner, carrying a Zacks Rank #2 at present, has a long-term earnings growth rate of 12.8%. CERN’s earnings surpassed estimates in three of the trailing four quarters and met estimates on another occasion, delivering an average surprise of 3.2%.

Cerner has gained 13.3% against the industry’s 57.6% slump over the past year.