Wall Street Isn't Giving Up on CVS Health -- and Its Valuation Looks Stronger Than Investors Think

CVS Health (NYSE: CVS) is a vertically integrated healthcare giant. It has around 9,000 retail pharmacy locations, more than 1,000 walk-in and primary care medical clinics, and is a leading pharmacy benefits manager with approximately 87 million plan members. Its Aetna segment is No. 2 in health insurance market share, according to the most recent National Association of Insurance Commissioners figures.

The company reported second-quarter earnings on Aug. 5. Revenue was $106.1 billion, up 7.3% year over year. Earnings per share (EPS) were up 188% over the same period, to $2.31.

CVS is predicting revenue of at least $414 billion in 2026, up from earlier estimates of at least $405 billion. Yearly EPS was forecasted between $6.84 and $7.04, again an increase from the earlier guidance of $6.24 to $6.44.

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Unfortunately for shareholders, the initial excitement over the earnings wasn't enough to sustain a rally for the stock.

The company's shares are down more than 12% over the past month, bringing its year-to-date gains down to 17%.

However, analysts are high on the healthcare giant, with an average price target of $116.08, nearly 25% above its current share price. Here are the reasons why the stock is oversold at this point.

What are investors' concerns about the stock?

They boil down to certain worries that could weigh on the company's future margins. On the earnings call, management mentioned membership declines at Caremark in 2027 and noted ongoing revenue headwinds in the 340B drug pricing program due to manufacturer-imposed restrictions.

The company's pharmacy benefit manager (PBM) side is facing regulatory scrutiny. That includes heightened Federal Trade Commission (FTC) oversight that led to an antitrust settlement with Caremark in July and proposed legislation targeting PBM pricing transparency. While the company's health benefits segment (Aetna) saw its medical benefit ratio improve to 87.4%, investors remain skeptical about whether medical cost trends will stay contained, given broader industry inflation in healthcare utilization.

The stock is priced for a buy now, though

The company doesn't really have a direct competitor because it operates in three different healthcare segments: PBM through Caremark, health insurance through its Aetna segment, and, of course, its pharmaceutical segment.

UnitedHealth Group, which mirrors CVS' vertically integrated model by combining health insurance with pharmacy benefit management and provider services, is the closest thing to a rival to CVS. When you compare the two, CVS is trading at less than 12 times forward earnings, while UnitedHealth Group is trading at just under 20 times earnings.

The company's strong dividend history, health

CVS has never cut its dividend and has increased it by more than 56% over the past decade. It's now $2.66 per quarterly share. The yield on that dividend is 2.8% at its current share price, more than twice the S&P 500 average.

With a cash payout ratio below 30% of free cash flow and an adjusted earnings payout ratio below 40%, its dividend is well protected. A dividend cut is unlikely under current operating conditions.

Adaptation is built into the company's DNA

CVS has been around for 63 years, and that's because it can constantly adapt to regulatory and market changes.

The two primary reasons CVS is likely to thrive over the long haul stem from its unmatched vertical integration and its proactive pivot to new business models.

CVS controls almost every step of the healthcare dollar, creating a self-sustaining ecosystem that insulates it from reliance on any single revenue stream. That ecosystem means that even if one part of the chain is seeing margin pressure, another area is likely to benefit. Considering the company's guidance and its performance so far this year, it's clear that the stock has considerable upside.

James Halley has positions in CVS Health. The Motley Fool recommends CVS Health and UnitedHealth Group. The Motley Fool has a disclosure policy.