CVS Health (NASDAQ: CVS) stock has been going on a rollercoaster ride in 2020 so far. The start of the year was promising as the healthcare giant hit 52-week highs. Unfortunately, COVID-19 sent CVS spiraling down. Investors are currently unsure what is in store for CVS come 2021 and beyond. Especially, as the CVS stock forecast is met with strong bullish and bearish arguments. Thus today’s article will walk our readers through the bullish and bearish forecasts for CVS.
Table of contents 1. Bullish case 2. Bearish rebuttal 3. Summary 2021-2024 forecast
CVS stock forecast 2021 – bullish argument
CVS’s financial strength lies in historical earnings and revenue growth, positive dividend forecasts, and the ability to service debt.
Investors began pouring money into CVS ever since they began driving revenue growth in 2019. Mainly because the insurgence of more revenue saw CVS turn red into green earnings. Analysts are projecting linear growth for CVS’s revenue from now, $260 billion, to 2024, $303 billion. If the bullish revenue expectations are met then analysts see earnings increasing by 25% to $10 billion by 2024.
Management, more specifically CEO Larry Merlo, is confident that CVS has a bright future. Mainly for the following reasons: the return of prescription drugs, the increase of Tele Health, and the reduction of COVID-19.
CVS’s retail and prescription sales understandably fell in Q2. However, according to Larry Merlo, “traffic is picking up and prescription utilisation is approaching normal levels”. Consequently, revenue in the coming quarters should return to promising pre-COVID levels. However, investors should not expect instant revenue recovery. Instead, a modest transition is likely.
Moreover, the pandemic accelerated CVS’s telehealth platform. Larry Merlo puts the growth into perspective as “CVS saw a dramatic 700% increase in telemedicine utilisation in the second quarter”. However, the growth of CVS’s telehealth platform will not stop after the virus fizzles out. Because CVS management is exploring the use of technology for home monitoring in 2021, with new product lines on the horizon.
Lastly, the pandemic shattered the CVS share price. However, the company’s establishment of 1800 test sites and a total of 2 million tested so far adds an extra layer of confidence. Also, CVS is increasing its focus on point of care testing right now. Thus, management has a strong conviction that CVS can weather the pandemic and aid in the suppression.
CVS stock forecast 2021 – bearish argument
There are two sides to the CVS financial coin, and the negatives should alert 2021 investors. The two major areas of concern include a declining Price-earnings ratio (P/E ratio) and the use of debt to increase Return on Equity (ROE).
While CVS may display robust earnings, their low P/E ratio of 9.1x would argue that future earnings are not so promising. Overall, the low P/E ratio means investors are anticipating limited earnings growth and hence the decline in the share price. Analysts seem to agree with the low P/E ratio. Especially, as they forecast CVS earnings to grow by 4.9% p.a while the health market posts 13% p.a. However if current investors are wrong CVS’s P/E ratio would place the company in the undervalued territory (opinion not advice).
Putting the share price volatility aside, CVS’s current and forecasted ROE, 12.1%, and 12.1% respectively is nothing to boast about. The general rule of thumb is that if the ROE is above 20% then it is considered financially strong. However, the more important question is what is driving the ROE debt or equity? In CVS’s case, it is debt. Considering the company’s debt to equity ratio increased from 36.2% to 103.4% over the past five years, investors should be wary of CVS’s ROE. Overall being below 20% both currently and in the future (2021-2024) as well as the concerning debt levels is a potential red flag.
The major stumbling block in the CVS 2021 success story is COVID-19. Because the pandemic causes the medical industry to shift from elective surgeries and generic drug prescriptions. CVS is scaling up its testing. However, any delay in the 2021 vaccine timeline will impact both CVS’s share price and fundamental business operations.
The hedge fund activity around CVS is suggesting a short-term bearish sentiment for two reasons. First, according to Insider Monkey, the number of hedge funds holding long positions in CVS fell by 6 at the end of Q2 2020. Consequently, the smart money does not see potential in CVS for the following quarters. If true the decline in hedge fund positions would confirm that the low P/E ratio is because of limited future earnings growth. Moreover, the number of long CVS hedge funds were at an all-time high back in 2019. Investors can conclude that while CVS may experience earnings growth it is not enough to spark smart money interest.
The CVS options chain is suggesting volatility is likely to be low for the remainder of 2020 and the beginning of 2021. October through to November puts/calls are relatively even in terms of volume. However, the CVS May options are more bullish. Interestingly by May, the world should have a viable vaccine and CVS would be back to business as usual.
Summary: CVS stock forecast 2021 – 2024
Overall, it seems the impressive earnings growth is catching up with CVS. All signs are pointing towards a stagnate or downwards share price for 2020. In particular a low P/E ratio, growing debt, and a reduction in long hedge funds. However, analysts are expecting strong earnings and revenue growth by 2024. It would be a smart move to investigate the long-term prospects of CVS further.
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The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin, Senior Manager of YIG.