The stock of CVS is undervalued if this happens
The fourth quarter figures confirm a positive trend for CVS: business is normal for the moment. Amazon has not yet made much progress in the pharmacy market, and CVS numbers say it well. The fourth quarter 's revenue figure rose 12.5%, under Aetna' s impetus. They grew about 5% in a full year. Pharmacy revenues increased by just over 2% in the quarter and year. Operating margins are largely stable and the guide implies improved margins next year. Numbers like this (business growth below 10% and gradual expansion of margins) could become the norm if: 1) Amazon does not campaign in pharmacy, or 2) the big push of the Amazon pharmacy is unsuccessful. In such a world, CVS clearly has the opportunity to increase its profits over the next few years. Indeed, assuming single-digit sales growth and a gradual increase in operating margin to 6.5%, EPS of US $ 8.75 appears to be achievable by 2025. On the basis of a historic historical multiple of 14, which equates to a price target of 2024 for the CVS stock of more than $ 120. With a discount of 7% per annum (3 points less than my normal 10% discount rate for yield), this is a 2019 price target of more than $ 85. The VCS stock is currently trading at 64 USD. Thus, in the best case where CVS eliminates the Amazon threat, this stock has a considerable upside potential.
CVS Stock is overvalued if this happens
Although the fourth quarter figures have been good, the basic argument is that these figures are only temporarily good. Eventually, Amazon will start its own pharmacy business – and subject traditional pharmacy retailers in the next few years to what it has done to traditional clothing retailers in recent years. In this scenario, CVS revenue growth will slow significantly. CVS will have the chance to increase its revenues from 0 to 1% per year. More importantly, margins will be eliminated. Many traditional retailers have seen their operating margins halved due to Amazon's low-cost competition. If such a significant reduction in competition can not occur in the pharmacy sector due to less competition, large margin declines will occur if Amazon succeeds in stealing parts of this market. The story continues
Conclusion on CVS stock
CVS shares are dumped here if – and only if – the company can successfully navigate Amazon's impending threat without significantly harming profits. Given what has happened in traditional retail, this seems unlikely. As such, the bullish thesis on CVS stock is unclear for the moment. As long as it stays true, the action will struggle to keep its gains.At the time of writing these lines, Luke Lango was long AMZN and Mr.
Compare brokers The post office The stock of CVS is undervalued, but Amazon risk weighs heavily appeared first on InvestorPlace.