To The Moon

$CVS Health(CVS)$

CVS Health (NYSE: CVS) sits at the intersection of healthcare delivery, retail pharmacy, and health insurance. Its vertically integrated model is designed to create long-term synergies by managing both the medical and pharmacy needs of its customers under one roof. In theory, this structure offers powerful cost efficiencies and a more holistic approach to patient care—one that aligns with broader trends in value-based healthcare.

But theory and execution are two different things.

Despite its ambitions and scale, CVS’s performance over the past decade has left investors with mixed feelings. Revenue has grown significantly—but much of that growth is acquisition-driven. Returns on invested capital are in decline. Its brick-and-mortar footprint is under pressure from changing consumer behavior. And yet, the stock is trading at a valuation that suggests the market is already pricing in these challenges.

In this article, I’ll explore whether CVS Health represents a compelling value opportunity, or a classic value trap. We'll analyze:

• Revenue trends and the quality of growth

• Declining ROIC and the underperforming retail segment

• A detailed discounted cash flow (DCF) valuation

• Forward valuation multiples and margin of safety

• The key risks facing the business

• My final verdict on whether CVS stock is a buy

The Revenue Story: Quantity Over Quality?

Let’s start with what looks like a win on the surface—revenue growth.

From $37 billion in 2005 to $153 billion in 2014, and now over $371 billion as of 2024, CVS has seen its top-line expand by nearly 10x in under two decades. The company’s 2018 acquisition of Aetna was a transformative moment, propelling CVS from a pharmacy chain into a full-fledged healthcare conglomerate.

But here’s the caveat: this growth is heavily acquisition-driven. Without the tailwind of M&A, it’s unlikely CVS would have achieved such scale organically. That distinction matters. Acquired growth often comes with integration challenges, cultural misalignment, and rising debt burdens—not to mention the difficulty in generating meaningful returns on these investments.

So yes, CVS has become a much larger company. But bigger doesn't necessarily mean better.

Q1 2025 Financial Highlights

• Total Revenue: $94.6 billion, up 7% year-over-year

• GAAP Diluted EPS: $1.41, increased from $0.88

• Adjusted EPS: $2.25, up 72% from $1.31 and beat expectations

• Cash Flow from Operations: $4.6 billion

Strong performance was driven by improvements across all segments, especially Health Care Benefits, which benefited from favorable prior-year developments and higher Medicare Advantage star ratings.

Segment Performance

• Health Care Benefits (Aetna): Revenue grew to $34.8 billion. Adjusted operating income more than doubled to $1.99 billion. Medical membership rose to 27.1 million. Medical Benefits Ratio improved to 87.3% from 90.4%.

• Health Services (CVS Caremark, Oak Street Health, Signify Health): Revenue rose to $43.5 billion. Adjusted operating income climbed to $1.60 billion. Processed 464.2 million pharmacy claims, up from 462.9 million.

• Pharmacy & Consumer Wellness: Revenue increased to $31.9 billion. Adjusted operating income rose to $1.31 billion. Prescriptions filled rose to 435.5 million from 417.6 million.

Updated 2025 Guidance

• Adjusted EPS: Raised to $6.00–$6.20 from $5.75–$6.00

• GAAP EPS: Revised to $4.23–$4.43 from $4.58–$4.83

• Cash Flow from Operations: Increased to about $7.0 billion from $6.5 billion

Return on Invested Capital: The Downward Drift

To assess whether CVS’s growth has created shareholder value, we turn to return on invested capital (ROIC). This metric reveals how effectively the company deploys capital to generate profit.

The trend here is concerning. CVS’s ROIC has declined from 8.6% in 2016 to just 3.1% today. That figure is not only falling—it’s also well below the company’s weighted average cost of capital (WACC), which I calculate at 9.24%. In plain terms, CVS is investing shareholder capital and receiving less in return than it costs to deploy.

That’s not sustainable.

The segment most responsible for dragging down returns is its retail pharmacy business. This legacy footprint—thousands of physical stores across the country—is becoming a liability in a world increasingly dominated by digital convenience.

While rivals like Walmart, Target, and Costco have adapted by driving in-store foot traffic through "buy online, pick up in store" (BOPIS) models or optimizing store density, CVS hasn’t articulated a similarly effective strategy. Without a clear pivot, this segment could continue to erode both profitability and investor confidence.

Intrinsic Value: Discounted Cash Flow Model

Despite these operational concerns, valuation is where the thesis gets interesting.

Using my proprietary discounted cash flow (DCF) model, I estimate CVS’s intrinsic value at $80.29 per share. Here's a quick summary of the assumptions:

• WACC: 9.24%

• Cost of Equity: 7.7%

• Cost of Debt: 9.5%

• Beta: 0.54, reflecting the defensive nature of healthcare

Why a low beta? Healthcare tends to be non-cyclical. Consumers don’t delay prescription purchases or healthcare services just because the economy softens. That gives CVS a degree of insulation that’s attractive in a diversified portfolio—especially during recessions or periods of high macro uncertainty.

Now compare that intrinsic value of $80.29 to the current market price of ~$62. That represents a 29% margin of safety, suggesting the stock is meaningfully undervalued.

Relative Valuation: Forward P/E Confirms Undervaluation

Let’s also consider a multiples-based approach, specifically the forward price-to-earnings (P/E) ratio.

At 10.14x forward earnings, CVS is trading well below its historical average and the broader healthcare sector. While a lower P/E might be justified by the challenges we've discussed, it also implies investors are overly pessimistic—especially when the company continues to generate robust free cash flow.

When both intrinsic (DCF) and relative (P/E) valuations suggest the stock is cheap, it raises the question: are investors over-discounting CVS’s challenges?

Risks: What Could Go Wrong?

Regulatory Pressure

CVS operates in one of the most politically sensitive sectors of the U.S. economy. Every administration, regardless of party, has proposed changes to healthcare policy—from drug pricing reforms to broader changes in insurance coverage. While CVS is diversified, any major disruption to Medicare or pharmacy benefits could impact its bottom line.

The Retail Drag

The biggest internal risk remains its retail operations. With thousands of physical locations and declining foot traffic, this legacy infrastructure is a cost center in need of transformation. Unlike Target and Walmart, CVS hasn’t demonstrated how it will turn these stores into assets rather than liabilities.

Debt from M&A

The company took on significant debt during the Aetna acquisition. While it has worked to deleverage since then, interest expenses are meaningful, especially in a higher-rate environment. That raises the bar for generating adequate returns.

Final Verdict: A Buy for Long-Term Investors

CVS is a business at a strategic crossroads. The company’s future success depends on its ability to extract synergies from its integrated healthcare model while addressing the declining performance of its retail footprint.

That said, the market appears to have already priced in most of these risks. With a forward P/E just over 10 and a DCF-implied value nearly 30% above today’s price, CVS presents a compelling value opportunity for patient, long-term investors.

Yes, the business has issues. But it also has a stable, cash-generating core in healthcare services, a non-cyclical demand base, and the scale to adapt—if management can execute.

Bottom line:

Rating: Buy Price Target: $80.29 Current Price: ~$62 Margin of Safety: ~29%

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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