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CVS: Formula Milk Is Not The Problem - Recession May Be

Summary Though CVS had delivered an excellent FQ1'22, things may go stagnant moving forward, given the impending recession. Combined with the rising cost of healthcare services and inflation, there may be temporary headwinds to CVS' top and bottom lines in FY2022. These could potentially lead to a significant correction in CVS' valuations and stock price. As a result, given that CVS is not particularly cheap now, we advise investors to adopt a wait and see approach for now. Investment Thesis As global supply chains start to hit baby formula, CVS Health Corporation (NYSE:CVS) has had to limit its sales. It is apparent that on top of increased material prices and shipping expenses, the hike in labor wages also leads to higher healthcare costs in the US, which may consequently increase insurance premiums. Given that CVS operates an insurance segment through Aetna, on top of its onsite/ virtual medical services through its MinuteClinic, HealthHUB, and collaboration with Teladoc (TDOC), we may expect temporary headwinds to its bottom line. These may also be further worsened with top-line misses, due to the waning COVID-19 vaccinations reducing onsite foot traffic, impending recession impacting retail consumer spending, and the proliferation of telehealth services, along with Amazon's (AMZN) entry into the space. As a result, we expect CVS to suffer a moderation in valuation and stock prices in the next few quarters, which will provide better entry points for interested investors. CVS Had An Excellent FQ1'22, Though Things May Be Stagnant Moving Forward CVS Revenue, Net Income, and Net Income Margin In the past five years, CVS grew its revenues and net income at a CAGR of 10.38% and 8.33%, respectively. The company had somewhat benefited from the additional foot traffic caused by the testing and vaccinations during the COVID-19 pandemic in the past two years. As a result, CVS reported sustained gross and net income margins in the past two years, at an average of 17.7% and 2.7%, respectively. In FQ1'22, CVS also reported excellent revenues of $76.66B and a net income of $2.31B, representing YoY growth of 11.4% and 4%, respectively. CVS Revenue By Segment It is evident that CVS has been growing its revenues excellently over the years. Despite the reopening cadence in the past few months, it is apparent that the company's offerings are still highly relevant. In FQ1'22, CVS reported tremendous demand across the board, with its Health Care Benefits reporting the highest YoY growth of 12.8%, while the Retail LTC segment also reported a favorable increase of 9.22% and Pharmacy Services 8.6%, before any other adjustments of revenue. In FQ1'22, CVS also reported 1.5M in-person and virtual healthcare visits, representing a nearly 35% YoY increase for its all-payer primary health care. Furthermore, with its expanded digital dashboard experience, CVS reported a 25% growth in active users QoQ to 5M in FQ1'22. Finally, the company serves nearly 44M unique digital consumers through its platform in FQ1'22, representing an increase of 18.9% in the past four months. As a result, we expect CVS' digital offerings to perform well in the future, since its digital consumers also frequent its offline stores twice more often. CVS Cash/ Equivalents, FCF, and FCF Margins CVS also reported improved Free Cash Flow margins in the past two years, at an average of 5.2% compared to 4.1% in FY2019. The company also had an excellent FCF of $2.51B with 3.3% FCF margins in FQ1'22. As a result, it is no wonder that the stock recovered by 5% post-earnings call on 4 May 2022, though those gains have also been digested by now. CVS Projected Revenue and Net Income CVS is projected to grow its revenue at a CAGR of 5.21% over the next three years, though its net income is expected to grow faster at a CAGR of 18.1%. Consensus also estimates that the company will report revenues of $308.57B and net incomes of $11.16B in FY2022, representing an excellent increase of 6% and 41% YoY, respectively. Moreover, given that CVS had raised its adj FY2022 EPS guidance by 1.2% to a range of $8.20 to $8.40 against consensus estimates of $8.27, it is evident that the company expects to stay above the game, despite the temporary headwinds stated above. So, Is CVS Stock A Buy, Sell, or Hold? CVS 5Y EV/Revenue and P/E Valuations CVS is currently trading at an EV/NTM Revenue of 0.61x and NTM P/E of 11.29x, slightly higher than its 5Y mean of 0.59x and 10.37x, respectively. It is also evident that its P/E valuations have also grown by almost 1.5 fold in the past two years. The stock is also trading at $94.93 on 20 May 2022, at a premium of 19.6% from its 52 weeks low of $79.34, though down 17.1% from its 52 weeks high of $111.25. TFT and COST 6M Stock Price Even though CVS may appear to be fair value now, we believe there is the possibility of a short-term decline, given the market correction surrounding Target (TGT)/ Costco () and the impending recession. In recent days, both TGT and COST had fallen hard by 27.8% and 15%, respectively, following the former's unsatisfactory performance in FQ1'22. Though CVS may be insulated from the market correction for the moment, given its multiple exposures to the insurance, pharmacy, and telehealth segments, we do not expect it to last long, given the factors discussed above. Even WBA's, TDOC's, and AMZN's stock prices have been battered, with them losing 24%, 72%, and 41.4% of their value in the past six months, respectively. Given the mixed market signals, we encourage investors to adopt a wait-and-see approach before adding more exposure to this stock, given the current bearish market sentiments. Furthermore, there is a possibility that the stock may retrace in the next few quarters, once CVS' top/ bottom lines are hit, with the recession reducing consumer spending and, potentially, insurance premiums moving forward. CVS 5Y Stock Price In addition, given CVS' Stock Price Appreciation of 22.85% and stock price return of 41.6% in the past five years, we think there are better stocks out there that can give better returns on your investment. Therefore, we rate CVS stock as a Hold for now. I am a full-time analyst interested in a wide range of stocks. With my unique insights and knowledge, I hope to provide other investors with a contrasting view of my portfolio, given my particular background.Prior to Seeking Alpha, I worked as a professionally trained architect in a private architecture practice, with a focus on public and healthcare projects. My qualifications include:- Qualified Person with the Board of Architects, Singapore.- Master's in Architecture from the National University of Singapore.- Bachelor in Arts from the National University of Singapore.If you have any questions, feel free to reach out to me via a direct message on Seeking Alpha or leave a comment in one of my articles.Disclosure: I used to be a promoting contributor for JR Research and the Marketplace service - Ultimate Growth Investing. My previous discussions include Teladoc, Novavax, Pfizer, Moderna, Johnson & Johnson, and Amgen while also including other non-healthcare stocks such as Enphase, AMC, Plug Power, FuelCell, Visa, and Skillz. However, I have departed the service and I am writing independently through my current account. Please do not hesitate to reach out to me if any clarification is needed. Disclosure: I/we have a beneficial long position in the shares of AMZN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: The analysis is provided exclusively for informational purposes and should not be considered professional investment advice. Before investing, please conduct personal in-depth research and utmost due diligence, as there are many risks associated with the trade, including capital loss. Comment

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