The stock of CVS Health (NYSE:CVS, 30-year Financials) shows every sign of being modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $81.97 per share and the market cap of $107.9 billion, CVS Health stock appears to be modestly overvalued. GF Value for CVS Health is shown in the chart below.
Because CVS Health is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 4.3% over the past three years and is estimated to grow 4.38% annually over the next three to five years.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. CVS Health has a cash-to-debt ratio of 0.11, which is in the bottom 10% of the companies in Healthcare Plans industry. The overall financial strength of CVS Health is 4 out of 10, which indicates that the financial strength of CVS Health is poor. This is the debt and cash of CVS Health over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. CVS Health has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $271 billion and earnings of $5.61 a share. Its operating margin is 5.18%, which ranks in the middle range of the companies in Healthcare Plans industry. Overall, the profitability of CVS Health is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of CVS Health over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of CVS Health is 4.3%, which ranks in the middle range of the companies in Healthcare Plans industry. The 3-year average EBITDA growth is 4.1%, which ranks worse than 69% of the companies in Healthcare Plans industry.
One can also evaluate a company’s profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, CVS Health’s ROIC is 5.61 while its WACC came in at 4.39. The historical ROIC vs WACC comparison of CVS Health is shown below:
In conclusion, the stock of CVS Health (NYSE:CVS, 30-year Financials) gives every indication of being modestly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 69% of the companies in Healthcare Plans industry. To learn more about CVS Health stock, you can check out its 30-year Financials here.
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