Growth stocks were hammered last year due to macroeconomic and geopolitical headwinds. However, they are expected to stage a recovery this year as interest rate hikes slow in response to cooling inflation, and the economy might achieve a soft landing.

Last week, the Fed raised interest rates by 25 basis points (bps), a slowdown from the 50-bps hike in December and a string of four 75-bps hikes from June through November 2022. While Fed Chair Jerome Powell hinted at a couple more rate increases, he added, “We can now say, I think for the first time, that the disinflationary process has started.” This indicates that the Fed is nearing the end of its hiking cycle.

Moreover, Powell is optimistic that the central bank can get inflation down to 2% “without a really significant downturn, or a really significant increase in unemployment.” He also said, “My base case is that there will be positive growth this year.” More dovish-than-expected comments from Powell feed Wall Street’s hopes of a soft landing of the economy.

Given the backdrop, investors could consider buying fundamentally strong growth stock CVS Health Corporation (CVS), which looks poised to deliver solid returns over the next decade. Shares of CVS have declined 7.7% over the past month to close the last trading session at $85.25. However, Wall Street analysts expect the stock to hit $116.00 in the next 12 months, indicating a potential upside of 36.1%.

Healthcare giant CVS’ revenue grew at a CAGR of 8.9% over the past three years. The company’s EBIT grew at a CAGR of 7.2% over the same period. Moreover, CVS delivered solid third-quarter results, with revenues increasing 10% year-over-year, driven by growth across all segments, including Health Care Benefits, Pharmacy Services, and Retail/LTC.

As a result of an outstanding quarter, the company raised its full-year guidance. CVS increased its adjusted EPS guidance range to $8.55 to $8.65 from $8.40 to $8.60. Also, the company expects cash flow from operations in the range of $13.50 billion to $14.50 billion, up from the prior guidance of $12.50 billion to $13.50 billion.

On December 15, 2022, CVS’ board of directors declared a quarterly dividend of $0.61 per share on its common stock, up 10% from the previous quarterly dividend. The dividend was paid on February 1, 2023. CVS’ annual dividend of $2.42 yields 2.82% on the current share price. Its dividend payouts have grown at a 2.4% CAGR over the past five years.

Here is what could shape CVS’ performance in the near term:

Positive Recent Developments

On January 23, 2023, CVS Accountable Care Organization, Inc., a division of CVS, entered a collaboration with RUSH University System for Health (RUSH) to expand access for Chicago-Area Medicare patients.

The collaboration allows patients seeking health services at various ACO REACH-participating MinuteClinic® locations in Chicago and Evanston to access care with RUSH and other ACO REACH entities for follow-up primary and specialty care.

Also, on December 1, 2022, CVS announced the opening of its first MinuteClinic locations in northern Delaware. MinuteClinic, the medical clinics within certain CVS Pharmacy locations, should offer high-quality and convenient care for acute and chronic diseases, expanding the company’s presence.

Solid Financials

For the third quarter ended on September 30, 2022, CVS’ total revenues increased 10% year-over-year to $81.16 billion, driven by growth across all segments. Its adjusted operating income came in at $4.23 billion, up 3.9% year-over-year. The increase in adjusted operating income was primarily driven by growth in the Healthcare Benefits and Pharmacy Services segments.

Furthermore, the company’s adjusted EPS came in at $2.09, up 6.1% year-over-year. As of September 30, 2022, CVS’ cash and cash equivalents were $17.20 billion, compared to $9.41 billion as of December 31, 2021.

Favorable Analyst Estimates

Analysts expect CVS’ revenue for the fiscal year (ended December 2022) to come in at $314.70 billion, indicating an increase of 7.7% year-over-year. The consensus EPS estimate of $8.64 for the same year indicates a 2.9% year-over-year increase. Also, the company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters.

In addition, the company’s revenue and EPS for the current fiscal year 2023 are expected to grow 3.5% and 2.5% from the previous year to $325.83 billion and $8.86, respectively.

Strong Profitability

CVS’ trailing-12-month EBITDA margin of 6.08% is 55.4% higher than the industry average of 3.91%. And its trailing-12-month net income margin of 1.00% is higher than the negative industry average of 5.84%. Also, the stock’s levered FCF margin of 5.60% compares to the industry average of negative 2.39%.

Moreover, CVS’ trailing-12-month ROCE, ROTC, and ROTA of 4.35%, 6.26%, and 1.36% compare with the industry averages of negative 40.08%, 22.11%, and 31.06%, respectively.

Attractive Valuation

In terms of forward non-GAAP P/E, CVS is currently trading at 9.93x, 51% lower than the 20.24x industry average. Likewise, its forward EV/Sales of 0.52x is 87.5% lower than the industry average of 4.18x, while its forward EV/EBITDA of 8.16x is 40.5% lower than the industry average of 13.69x.

Also, CVS’ forward Price/Sales of 0.36x compares to the industry average of 4.86x. And the stock’s forward Price/Book of 1.56x is 44.8% lower than the industry average of 2.82x. 

POWR Ratings Reflect Promising Outlook

CVS has an overall A rating, which equates to a Strong Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. The stock has a B grade for Growth, consistent with its solid financials in its last reported quarter and optimistic analyst estimates. In addition, it has a B grade for Value, in sync with its lower-than-industry valuation metrics.

In the four-stock B-rated Medical – Drug Stores industry, CVS is ranked first.

Click here for the additional POWR Ratings for CVS (Stability, Momentum, Sentiment, Quality). Also, view all the top stocks in the Medical – Drug Stores industry here.

Bottom Line

CVS had an outstanding third quarter. Furthermore, the company raised its full-year adjusted EPS and cash flow from operations guidance. CVS continues to execute its strategy with a focus on expanding capabilities in health care delivery and access. Moreover, the company’s strong financial position allowed it to increase its quarterly dividend.

Given CVS’ financial strength, promising growth prospects, attractive valuation, and high profitability, this growth stock could be a solid long-term addition to your portfolio.

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CVS shares fell $0.10 (-0.12%) in premarket trading Tuesday. Year-to-date, CVS has declined -7.89%, versus a 7.16% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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