Summary of the evaluation
CVS Health (CVS) is down 19.4% since April 3rd. Increased pressure on repayments, deflation of generic drugs and low brand inflation are expected to weigh on profits. The low earnings outlook weighs on the price of its shares.
At the same time, rival Walgreens Boots Alliance (WBA) also cited a similar reason for its underperformance and lowered its earnings outlook for the year. The weak quarterly results and reduced expectations have shaken investor sentiment on WBA shares. Walgreens is down 19.7% so far this year.
WAKE UP WITH BAGELS & STOX, OUR NEW E-MAIL THAT WILL INFORM YOU AND INFORM YOU BEFORE THE DAY. REGISTER HERE!
Given the recent decline, CVS Health's shares are trading at a significant discount. As at April 3, CVS's shares were trading at a multiple of PE at 7.8, about 47% below its historical five-year historical multiple of 14.6x. Meanwhile, Walgreens shares are trading at a multiple of 9 times 9, about 44% lower than its five-year historical multiple.
We expect that short-term challenges will determine the direction of these stocks and limit the increase. Analysts expect the net income of these two companies to decline in the near term as a result of increased repayment pressure.
However, unless there are short-term barriers, CVS Health and Walgreens appear attractive from a valuation standpoint. The net result of CVS Health is expected to stabilize in fiscal year 2020 and increase by 7.0%. In addition, the CVS Health stock currently offers a dividend yield of 3.8%.
In comparison, Walgreens' net profit should also remain low in the short term. However, management expects repayment pressures to dissipate in the coming quarters, which in turn should support earnings growth. The current dividend rate of Walgreens is 3.2%.