CVS Health (CVS): How Legal Costs and Margin Pressures Are Shaping Its Valuation After Recent Earnings

CVS Health (CVS) just wrapped up a headline-making quarter, and if you own the stock or have it on your watch list, this is one of those moments that forces a double take. The company’s Health Services segment delivered a healthy 10% revenue jump in the latest quarter, but that top-line boost was overshadowed by a nearly 18% decline in adjusted operating income. The company attributed this to a combination of higher medical costs, richer benefit offerings, and a sizable $291 million litigation charge. CVS also settled with the state of Massachusetts for $12.25 million over alleged pharmacy billing issues, which serves as a reminder that even industry leaders like CVS can face regulatory and legal challenges.

Despite these crosscurrents, the market’s perception of CVS Health appears to be evolving this year. Shares have staged a meaningful rebound, up 33% over the past year, although this only partially recovers earlier declines. This momentum has been supported by improvements in key business lines and steps to realign operations for potential margin growth. At the same time, ongoing legal issues and profit margin pressures have kept risk at the forefront for both optimistic and cautious investors.

After a year of recovery and some turbulence in recent weeks, the question remains whether CVS Health is currently trading at a bargain or if investors have already factored in expectations of better performance ahead.

Most Popular Narrative: 29% Undervalued

According to the narrative by yiannisz, CVS Health is currently trading well below its intrinsic value. This presents a significant discount and implies potential for future upside if the business executes its recovery plans.

"The DCF valuation of CVS Health calculates a fair value of around $103, indicating a 45% undervaluation compared to its current market price of $56.49. This valuation uses several key inputs: a discount rate of 9%, chosen to balance CVS's growth potential and industry risk, and an EPS growth rate of 4.7% over ten years, which accounts for expected stable, long-term growth."

What kind of company growth could justify such a stark difference between today’s price and fair value? This narrative is driven by ambitious assumptions for earnings growth, future margins, and the impact of a turnaround strategy. Curious about which number holds the secret to this discounted valuation and why so many see a hidden opportunity here? The answer is found in the bold forecasts and scenario-testing that shape this fair value target.

Result: Fair Value of $103 (UNDERVALUED)

Have a read of the narrative in full and understand what's behind the forecasts.

However, rising medical costs and challenging margins could quickly erase any gains if CVS struggles to control expenses or encounters additional regulatory headwinds.

Find out about the key risks to this CVS Health narrative.

Another View: What Does Our DCF Model Say?

For a fresh perspective, the SWS DCF model was also used to value CVS Health. This approach still suggests the stock is undervalued, but it relies on projected future cash flows rather than market multiples. Could this method capture something the market is missing?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out CVS Health for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own CVS Health Narrative

If you see things a bit differently or want to dig deeper into the numbers, you can craft your own CVS Health story in just a few minutes. Do it your way.

A great starting point for your CVS Health research is our analysis highlighting 3 key rewards and 3 important warning signs that could impact your investment decision.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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