The price action in CVS Health NYSE: CVS has been coiling up over the last 15 months and it looks ready to spring higher. The latest earnings report confirms the trend and trajectory of growth and has the market moving higher even now. What this means for investors is a multiple potential expansions that could easily take it up to new all-time highs.
Trading at 10X its earnings it is a value relative to the broad market, it is forecasting growth and it pays twice the yield of the S&P 500. And this dividend is above average in quality as well.
The company is paying out only 24% of its earnings and has such a strong balance sheet it was able to make another acquisition without the use of debt. In this light, not only is the outlook for growth robust, but so too is the outlook for dividend growth. The latest acquisition is Oak Street Health and has yet to pass regulatory approval. Oak Street is a primary care provider that is expected to add $2 billion in EBITDA to annual results by 2026.
It is also expected to result in around $0.500 billion in synergies which will drive margin improvement in the core and Oak Street segments.
CVS Has Strong Quarter, Issues Strong Guidance
CVS not only had a strong quarter but issued strong guidance as well. The takeaway from the guidance is that results are expected to align with the analyst's expectations without the addition of Signify, which is yet to be completed. As for Q4 2022, the company reported $83.8 billion in revenue for a gain of 9.4% versus last year.
The gains were driven by strength in all segments, led by Health and Pharma, which is good news for competitors like Walgreens Boots Alliance NASDAQ: WBA and Rite Aid NYSE: RAD. CVS revenue also outpaced the Marketbeat.com consensus estimate by 1000 basis points which is also good news for competitors.
Moving down, the company was able to expand margins as well. The operating margin expanded by 290 basis points, and the net income margin by 160 to drive solid bottom-line results. The caveat is that 1-offs in the report mean the $1.99 in earnings is up a slim $0.01 versus last year but outpaced the consensus by $0.06. Turning to the guidance, the company is expecting adjusted EPS of $8.70 to $8.90 versus the $8.86 expected by the analysts.
The Analysts Prefer CVS Health
The Analysts prefer CVS Health to Rite Aid and Walgreens; that is clear. The consensus sentiment for CVS is a Moderate buy compared to Hold for Walgreens and Sell for Rite Aid. The price target for CVS is also favorable, as it implies more than 30% of upside and has been trending higher all year.
There are no new ratings or price targets on Marketbeat.com’s analyst tracking page yet, but they should be consistent with the trend when they come.
The chart of CVS shows a 15-month range with 3 tops and 3 bottoms that are edging lower as they move sideways. This range is a coiled spring of bulls and bears that has this stock ready to unwind. Assuming the analyst's interest remains favorable, this market should unwind to the upside.
The next target for resistance is at the 150-day moving average, a move above that should get it back up near the all-time highs. If the company can progress on its plans, it may move to new highs by summer 2023 and meet or exceed the $119 consensus target.
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