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CVS Stock Is Worth Buying Ahead of Its Earnings

Will Healy

Many eyes will turn toward CVS Health (NYSE:CVS) stock as it reports its earnings on Wednesday, Aug. 7 before the bell.  CVS stock price entered a long-term downtrend in 2015 that has wiped out more than half of its value. With CVS facing new competitive threats and having bought a health insurer, doubts linger about CVS stock.

Why CVS (CVS) Stock Looks Attractive at Its Current Levels

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However, given the valuation and dividend of CVS stock,  investors have little to lose by buying CVS  before its earnings.

Expect Huge Revenue Growth, Lackluster Earnings Growth

For CVS’ Q2, analysts, on average, predict earnings of $1.69 per share. If the company meets the consensus estimates, its EPS will be unchanged versus the same quarter last year. However, analysts’ average revenue estimate is  $62.65 billion, 34% higher than the year-ago figure of $46.71 billion.

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The takeover of insurance giant Aetna helped to boost CVS’ revenues, though the company’s  profits aren’t increasing much as it works to fully integrate the insurer into CVS Health. Also, CVS usually beats consensus earnings expectations, so CVS stock price could still be boosted by year-over-year profit growth.

The Struggles Continue for CVS

But CVS stock does pose some risks. In a recent article, I called CVS stock a “highly-flawed equity” that investors should buy. The company’s pharmacy business  will likely face competition from the likes of Amazon (NASDAQ:AMZN).

Moreover, CVS’  purchase of Aetna drew the ire of both political parties. Also, for those who watched the recent Democratic presidential debates, the cost of drugs figured prominently. With the outcome of the 2020 presidential election far from certain, changes in the political environment could profoundly alter the outlook of CVS stock two years from now.

That makes CVS stock price today cheap for a reason. It reflects the uncertainty  created by the company’s acquisition of Aetna. It also bakes in some issues with the balance sheet that did not escape the notice of InvestorPlace columnist Bret Kenwell. Seeing current liabilities exceed current assets makes investors uneasy.

Also, the Aetna purchase caused CVS’  long-term debt to jump. This figure stood at just over $22 billion at the end of 2017. As of the end of Q1, it stood at almost $67.9 billion. That is a significant burden for a company with about $59.7 billion in stockholders’ equity.

CVS Offers Future Growth at a Low Multiple

However, some recent good news has been beneficial for CVS stock price and its peers such as Walgreens Boots (NASDAQ:WBA) and Rite Aid (NYSE:RAD). Specifically, the Trump administration scrapped its plan to reduce the reimbursements paid by Medicare to pharmacy benefit managers (PBMs), a significant source of revenue for CVS.

Moreover, from a financial standpoint, it would take a cataclysmic event to take CVS stock price significantly lower. Its forward price-earnings (PE) ratio now stands at just 7.8.

The low PE ratio and a dividend yield that stands at almost 3.6% should draw income-oriented investors. A resumption of CVS’ streak of annual dividend increases, would be another positive catalyst for CVS stock.

The Bottom Line on CVS Stock

CVS stock has struggled in recent years. However, with the low PE ratio and the stock price hitting a plateau in the last few months, investors may have little to lose by buying CVS at these levels.

Demographic trends bode favorably for CVS stock, as the U.S. population is rapidly aging. Moreover,  CVS stock price is quite cheap

Furthermore, CVS’ price action in recent months indicates CVS stock price  may be poised to climb. Since early March, CVS has stayed in the $50s per share range. CVS stock price today is less than 10% above  ts 52-week low of  $51.72.

If a strong positive catalyst emerges , CVS stock may rise again. Perhaps the second-quarter earnings report will be that catalyst.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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