CVS Health (NYSE:CVS), the retail pharmacy giant making bold strides into healthcare, is facing a perplexing paradox. On one hand, it boasts a juicy 4.3% dividend yield – more than double the S&P 500 average – and trades at a seemingly undervalued 11 times earnings. On the other hand, its stock has plummeted 22% year-to-date, leaving investors bewildered.
The May 1 earnings report triggered a sell-off as CVS drastically slashed its adjusted earnings guidance for the year from $8.3 to $7 per share. The culprit? Skyrocketing medical costs, particularly in their Medicare Advantage business, driven by a surge in previously postponed surgeries as the world emerges from the pandemic's shadow.
CEO Karen Lynch acknowledges the "broad-based utilization pressure," but is this a temporary setback or a sign of deeper trouble?
For long-term investors, this could be an opportunity in disguise. CVS is still integrating recent acquisitions like Signify Health and Oak Street Health, which are expected to drive cost reductions and efficiency gains.
Moreover, CVS is strategically positioned to capitalize on the secular growth of the healthcare sector, with its diversified business model encompassing home health and primary care. The company is also leveraging artificial intelligence to streamline operations and make data-driven decisions.
Currently trading near 2020 levels, CVS stock looks like a bargain. It offers a compelling combination of growth potential and income generation for patient investors. However, the Motley Fool Stock Advisor team didn't include it in their top 10 picks, suggesting caution is warranted.
CVS Health is a complex story with both risks and rewards. The short-term outlook is clouded by rising medical costs, but the long-term potential is undeniable. Investors who can stomach the volatility and focus on the bigger picture may find CVS to be an undervalued gem in the healthcare sector.
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