Actions of CVS (NYSE:CVS) dropped sharply on Wednesday, Feb. 20, after the pharmacy retailer posted mixed fourth-quarter figures, which included a disappointing earnings guide for fiscal 2019. Investors were disappointed. CVS shares fell by more than 5% in response and are now trading a few percentage points higher than their lowest level in five years.

The stock of CVS is undervalued, but Amazon risk weighs more

Source: Mike Mozart via Flickr At these levels, the stock of CVS seems undervalued – as long as historical trends continue. The multiple of term gains is a hair less than 9.5. Assuming that revenue growth continues to stabilize in the lower single digit range and margins improve gradually with the acquisition of Aetna, an advanced one-digit P / E multiple is simply too low for CVS shares. The problem is that historical trends can do not Stand here. the Amazon (NASDAQ:AMZNthe threat weighs heavily. Many fear – and rightly so – that Amazon is preparing a big launch in the pharmacy sector. Such a launch could have a catastrophic impact on CVS. Revenue growth will not stabilize in the lower single digit range. Margins will not go higher. Instead, CVS will follow in the footsteps of other companies disrupted by Amazon, such as Macy's (NYSE:M) and Kohl's (NYSE:KSS). With these two companies, revenue growth slowed down – and sometimes even turned negative – while margins collapsed. If this happens with the CVS stock, a one-digit P / E multiple today is warranted and the stock might actually be subject to further weakness.InvestorPlace – Stock Market News, Stock Advice and Trading AdviceOverall, the bullish thesis on CVS stock is based on the Amazon threat. Since this threat carries a lot of risk, the bull's thesis about the SVC stock is very uncertain. As such, low risk investors would be wise to stay out of the way and wait for more clarity.

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

If revenue growth slows barely above zero and margins fall by a few points, then CVS could only aim for a $ 5 EPS by the year 2025. Next same calculation, the target set for fiscal year 2019 is less than $ 50 for CVS shares. Thus, in the worst case, when CVS is affected by the Amazon threat, this stock has considerable potential for loss.

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.

More InvestorPlace

Compare brokers The post office The stock of CVS is undervalued, but Amazon risk weighs heavily appeared first on InvestorPlace.