Is There an Opportunity in CVS Health After Its Recent 7.3% Share Price Rise?

If you have followed CVS Health’s journey in recent months, you know the ride has been anything but dull. After some ups and downs, the stock is currently trading at $81.93. Over the past 30 days, it posted a healthy 7.3% gain, fueling optimism among investors who were concerned after a slight dip of 0.7% last week. Year-to-date returns are striking at 85.3%, and if you zoom out to the one-year mark, the growth stands at 51.2%. That said, a look even further back reminds us that not all periods have been rosy, with a mild loss over the past three years, contrasted with a strong 71.8% return across five years.

What is behind these moves? Industry shakeups and renewed focus on healthcare innovation have put CVS Health in the spotlight. The company’s push into primary care and digital pharmacy solutions has caught the eye of both Wall Street and Main Street, fueling recent share price appreciation and a feeling that growth potential is still on the table. However, market sentiment also seems to be recalibrating the company’s risk profile, especially as CVS navigates the ever-shifting healthcare landscape.

So, is CVS undervalued, fairly valued, or at risk of being overhyped? According to our valuation scorecard, CVS checks three out of six boxes for being undervalued, coming in with a value score of 3. Over the next sections, I will break down exactly how we arrive at this score by diving into each valuation method. Stay with me to the end as there is an even smarter way to judge value that goes beyond just the numbers.

CVS Health delivered 51.2% returns over the last year. See how this stacks up to the rest of the Healthcare industry.

Approach 1: CVS Health Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) model estimates a company’s worth by forecasting its future cash flows and discounting them back to their present value. This approach aims to answer what CVS Health would be worth if you owned all of its future free cash flow today.

Currently, CVS Health’s last twelve months free cash flow is $4.58 billion. Analysts forecast steady growth, with free cash flow projected to rise to $13.17 billion by 2029. Over the coming decade, expected free cash flows are forecast to exceed $10 billion per year from 2030 onwards, with future projections extrapolated beyond what analysts directly estimate.

According to this DCF model, the estimated intrinsic value of CVS Health is $280.89 per share. With the stock recently trading at $81.93, the model suggests the share price is about 70.8% below its underlying value.

In summary, based on this cash flow-based approach, CVS Health appears significantly undervalued compared to what the business might actually be worth.

Result: UNDERVALUED

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for CVS Health.

Our Discounted Cash Flow (DCF) analysis suggests CVS Health is undervalued by 70.8%. Track this in your watchlist or portfolio, or discover more undervalued stocks.

Approach 2: CVS Health Price vs Earnings (PE)

For profitable companies like CVS Health, the Price-to-Earnings (PE) ratio is one of the most widely used metrics to quickly gauge whether a stock is trading at an attractive valuation. The PE ratio measures how much investors are willing to pay for each dollar of earnings, and it tends to reflect not just profitability, but also the growth prospects and perceived risks of the business. Higher expected growth or lower perceived risk usually justifies a higher PE, while slow growth or greater risk brings that number down.

Currently, CVS Health trades at a PE ratio of 22.9x. This puts the company slightly above the average for healthcare industry peers (21.6x) and the larger peer group average (19.6x). At first glance, it might look a little expensive relative to these numbers, but multiples alone do not tell the full story.

This is where Simply Wall St’s Fair Ratio comes in. The Fair Ratio (39.1x in this case) is our proprietary benchmark that takes into account not just peer and industry averages, but a blend of key factors such as earnings growth potential, market cap, profit margins and associated business risks. By tailoring the benchmark for a company’s specific strengths and challenges, the Fair Ratio offers a much more nuanced picture of valuation than simply comparing with competitors.

When we compare CVS Health’s current PE of 22.9x with its Fair Ratio of 39.1x, it suggests the stock is trading well below what our comprehensive valuation framework considers fair, which signals undervaluation on this metric.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your CVS Health Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let’s introduce you to Narratives. A Narrative is your personal investment story, where you interpret a company’s future by combining your own financial estimates, like future revenue, earnings, and profit margins, with your perspective on its opportunities and challenges.

Instead of relying only on traditional models, Narratives let you link CVS Health’s story, such as its push into managed care, restructuring, or pharmacy expansion, directly to your financial forecast. This makes it clear how your outlook translates into a fair value for the stock.

This tool is easy to use and available to everyone on Simply Wall St’s Community page, where millions of investors build, share, and update Narratives as new information or news comes in. Narratives help you spot when it might make sense to buy or sell by visualizing the gap between your Fair Value and the current market price.

For example, one investor believes CVS Health deserves a fair value of $103, seeing strong turnaround prospects and revenue momentum, while another values it at just $70, concerned about lingering cost pressures and margin risks. This shows how Narratives reflect your unique perspective and update as the facts change.

Do you think there's more to the story for CVS Health? Create your own Narrative to let the Community know!

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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