Here's Why You Should Retain CVS Health (CVS) Stock for Now

·5 min read

CVS Health Corporation CVS is well poised for growth, backed by the announcement of entering into a colossal $10.6-billion acquisition agreement to purchase Oak Street Health. The better-than-expected results for the fourth quarter buoy optimism about the stock. Yet, poor macroeconomic conditions and stiff competition remain concerns.

In the past year, the Zacks Rank #3 (Hold) stock has lost 25.6% compared with the industry’s 26.8% fall and the S&P 500’s 8.4% decline.

The pharmacy innovation company, with integrated offerings across the entire spectrum of pharmacy care, has a market capitalization of $97.88 billion. The company projects 7.3% growth for the next five years. It surpassed estimates in the trailing four quarters, the average surprise being 5.9%.

Riding on current business growth and bullish near-term prospects, the company is worth holding on to for now.

Key Growth Catalysts

Q4 Upsides: CVS Health exited the fourth quarter of 2022 on a strong note, with earnings and revenues beating the respective Zacks Consensus Estimate. Robust sales growth across all three operating segments drove the top-line results. Within the Health Care Benefits arm, the continued growth across the entire range of insured and self-insured medical, pharmacy, dental and behavioral health products and services instills optimism. The company’s parallel announcement of entering into a colossal $10.6-billion acquisition agreement to purchase Oak Street Health is an added positive. Oak Street Health is a network of value-based primary care centers for adults on Medicare. The acquisition is expected to advance CVS Health’s care delivery strategy for consumers.

Health Care Benefit Shows Potential: Following the colossal acquisition of health insurance giant Aetna for a colossal sum of $70 billion, CVS Health introduced its Health Care Benefits business arm. This segment has been exhibiting continued strong momentum for the past few quarters. In the fourth quarter, the business delivered strong revenue growth of 11.3% year over year, banking on growth across all product lines. During the reported quarter, Medical membership increased by 109,000 members compared, reflecting increases across all product lines. The segment witnessed favorable development of prior periods’ healthcare cost estimates in its Government Services and Commercial businesses during the fourth quarter.

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Balance Sheet View Strong: CVS Health ended 2022 with cash and cash equivalents of $12.95 billion, up from $9.41 billion at the end of 2021. Meanwhile, total debt came up to $52.25 billion compared with $56.17 billion at the end of 2021. Although the total year-end debt was much higher than the corresponding cash and cash equivalent level, the near-term payable debt is at $1.8 million, lower than the short-term cash level. This is good news in terms of the company’s solvency level as, at least during the year of economic downturn, the company is holding sufficient cash for debt repayment.


Competitive Landscape: In spite of significant new client wins during a strong selling season, intense competition and tough industry conditions act as major impediments. Major competitors such as Walgreens, Target and Wal-Mart are expanding their pharmacy businesses. Competition is especially tough in the pharmacy segment as other retail businesses continue to add pharmacy departments and low-cost pharmacy options become available. Discount retailers, in particular, have made substantial inroads in gaining market share.

Poor Macroeconomic Condition: Although prescriptions and related health care service providers like CVS stay out of general macroeconomic turmoil, the recent debt crisis and sluggish economic conditions in the United States could impact consumer purchasing power. This may also influence preferences and spending patterns, resulting in low prescription utilization.

Estimate Trend

In the past 30 days, the Zacks Consensus Estimate for its fiscal 2023 earnings has been constant at $8.84.

The Zacks Consensus Estimate for fiscal 2023 revenues is pegged at $333.43 billion, suggesting a 3.4% rise from the year-ago reported number.

Key Picks

A few better-ranked stocks in the overall healthcare sector include Haemonetics Corporation HAE, TerrAscend Corp. TRSSF and Akerna Corp. KERN . Haemonetics and TerrAscend both sport a Zacks Rank #1, while Akerna carries a Zack Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Haemonetics’ stock has risen 42.1% in the past year. Earnings Estimates for Haemonetics have increased from $2.87 per share to 2.91 for 2023 and from $3.02 per share to $3.28 for 2024 in the past 30 days.

HAE’s earnings beat estimates in each of the last four quarters, delivering an average surprise of 10.98%. In the last reported quarter, it reported an earnings surprise of 7.59%.

Estimates for TerrAscend in 2023 have remained constant at a loss of 10 cents per share in the past 30 days. Shares of TerrAscend have declined 70.6% in the past year.

TerrAscend’s earnings beat estimates in one of the last three quarters and missed the mark in the other two, the average negative surprise being 136.11%. In the last reported quarter, TRSSF delivered an earnings surprise of 216.67%.

Akerna’s stock declined 95.7% in the past year. Its estimates for 2023 have remained constant at a loss of $1.91 per share over the past 30 days.

Akerna missed earnings estimates in each of the last four quarters, delivering a negative earnings surprise of 15.49%, on average. In the last reported quarter, KERN delivered a negative earnings surprise of 13.33%.

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