Shares of drug retailer CVS have outpaced the market in recent months.
Justin Sullivan/Getty Images
CVS Health stock has returned 34.7% since last November, while the S&P 500 has climbed just 22%. That’s a solid run, particularly following the first 10 months of 2020, in which CVS stock fell 21.5%, while the S&P 500 climbed 3.1%.
The recent share spike came as positive vaccine developments spurred hopes for a recovery from the Covid-19 pandemic, which has battered CVS’s (ticker: CVS) earnings. But now, Guggenheim analyst Glen Santangelo says that the stock has risen far enough.
In a note out early Wednesday, Santangelo downgraded CVS stock to Neutral, from Buy, and removed his $78 price target, writing that the climb in share price has created a “more-balanced risk/reward.”
“We continue to believe CVS is well-positioned, and are not trying to flag any near-term concerns,” Santangelo wrote. “We remain positive on the competitive position of the company, but cautiously optimistic on the durability of the long-term growth profile for the company given the structural challenges. With the shares at ~$75, trading at roughly ~8x our estimated [2022] Ebitda [earnings before interest, taxes, depreciation and amortization], we see a more balanced risk/reward at current level.”
Santangelo set no new price target for CVS. The stock is down 1.6% to $73.90 in Thursday morning trading. It is up 8% so far this year.
CVS stock trades at 9.8 times earnings expected over the next 12 months, just below its five-year average of 10.7 times earnings. Of the 27 analysts tracked by FactSet who cover the stock, 20 rate it at Buy or Overweight, while seven rate it at Neutral.
CVS did not immediately respond to a request for comment on Santangelo’s downgrade.
In his note, Santangelo attributed the share climb since November to a belief among investors that an effective Covid-19 vaccine would help boost sales at drug retailers such as CVS. “We agree with that premise, and based on our conversations with investors, it is clear that the recovery thesis is working its way into the valuation and expectation,” Santangelo wrote.
But he said that any revenue from vaccine administration itself would likely be short-term. “We are enthusiastic about the opportunity CVS will play as part of this process, but still view this as being a transitory element of the thesis and earnings profile,” he wrote.
Santangelo wrote that he is only cautiously optimistic on CVS’s long-term growth, citing structural pressures, including competition from online retailers. “We do not expect these issues to meaningfully alleviate from the industry on a long-term basis, and they will likely continue to pressure growth moving forward,” he wrote.
Write to Josh Nathan-Kazis at [email protected]
