In this piece, I evaluated two stocks, CVS Health Corporation (CVS) and MedAvail Holdings, Inc. (MDVL), to determine which is a better investment. Based on a fundamental comparison of these stocks, I believe CVS is the better buy for the reasons explained throughout this article.
Healthcare is considered one of the safest industries to invest in as it enjoys stable demand even during a recession. Irrespective of the economic cycle, healthcare companies usually experience steady profit margins.
The U.S. pharmacy sector can be broken down into four types: Retail chains, regional pharmacies such as mass retail and grocers, independent pharmacies, and mail-order and online pharmacies.
The drug stores industry is well-positioned for long-term growth thanks to rising demand from an aging population, with private health insurance boosting demand for prescription medicine. The U.S. Pharmacies and Drug Stores industry market size was $553.90 billion in 2022. The industry’s revenue is expected to increase 2.9% year-over-year to $569.80 billion in 2023.
Last year, President Biden signed into law the Inflation Reduction Act. Among several provisions, the law aimed to lower prescription drug costs. The new Medicare Prescription Drug Inflation Rebate Program protects people with Medicare and taxpayers when drug companies raise prices faster than the rate of inflation.
Thanks to the law, people with Medicare can save a considerable amount on prescription drugs, thereby making healthcare more accessible, affordable, and equitable. The new drug law will strengthen the Medicare program by lowering drug costs and stabilizing prescription drug premiums.
This is expected to improve consumer purchasing power, leading to higher demand for healthcare products and medications, benefiting pharmacies and drug stores. CVS surpassed its first-quarter EPS and revenue estimates. Its EPS came 5.2% above analyst estimates, while its revenue beat the consensus estimate by 5.7%.
CVS Health President and CEO Karen S. Lynch said, “We delivered another strong quarter while executing on the strategy we outlined in December 2021, leading to the close of the Signify Health acquisition, followed quickly by Oak Street Health. These additions are core to our strategy and will help unlock future growth as we push further into value-based care, which prioritizes keeping people healthy.”
MDVL’s CEO Mark Doerr said, “During the first quarter, we made good progress toward our mission of becoming a leader in the development and manufacture of pharmacy technology solutions in the short time since we announced the sale of certain of our SpotRx assets to CVS in January.”
“Our pipeline continues to grow, representing a mix of both new and existing partners, and we remain on track to achieve our previously stated goal of adding 25 net new dispensing MedCenters to our network this year,” he added.
For fiscal 2023, CVS’ adjusted EPS is expected to come between $8.50 and $8.70. Its cash flow from operations is forecasted to reach between $12.50 billion and $13.50 billion. MDVL’s total revenue for the pharmacy technology business in fiscal 2023 is expected to be $3 million. Its gross margins are expected to be higher than 60%.
When it comes to price performance, MDVL has performed better than CVS for the one-time frame. MDVL’s stock has gained 4.1% over the past month, compared to CVS’ decline of 6.4%. However, despite both companies reporting negative price performance, CVS’ stock has performed better than MDVL's in other time frames.
CVS’ stock has declined 32.4% in price over the past nine months and 30.8% over the past year. In comparison, MDVL’s stock has declined 80.4% over the past nine months and 85.9% over the past year.
Here are the reasons I think CVS could perform better in the near term:
Positive Developments
On May 2, 2023, CVS announced the acquisition of Oak Street Health for $39 per share, representing an enterprise value of approximately $10.60 billion. The acquisition will expand CVS Health’s value-based primary care platform and benefit patients’ long-term health by improving outcomes and reducing costs.
On March 29, 2023, CVS announced the acquisition of Signify Health for a total transaction value of $8 billion. CVS Health President and CEO Karen S. Lynch said, “This transaction advances our value-based care strategy by enhancing our presence in the home. Our expanded capabilities will bring us closer to the consumer as we continue to redefine how people access and experience care that is more affordable, convenient, and connected.”
Recent Financial Results
CVS’ total revenues for the first quarter ended March 31, 2023, increased 11% year-over-year to $85.28 billion. Its adjusted operating income declined 5.1% over the prior-year quarter to $4.37 billion. The company’s net cash provided by operating activities increased 108.8% year-over-year to $7.44 billion.
Its adjusted net income declined 6.9% year-over-year to $2.84 billion. Also, its adjusted EPS came in at $2.20, representing a decline of 4.3% year-over-year.
For the fiscal first quarter ended March 31, 2023, MDVL’s total revenue rose 134% year-over-year to $620 thousand. Its operating loss narrowed 7.4% over the prior-year quarter to $5.01 million. The company’s adjusted EBITDA loss narrowed 17.1% year-over-year to $3.66 million. In addition, its net loss widened 33.1% year-over-year to $17.33 million. Also, its loss from continued operations narrowed slightly year-over-year to $0.16.
Expected Financial Performance
CVS’ EPS for fiscal 2023 is expected to decline 0.6% year-over-year to $8.64, while its revenue for the same year is expected to increase 7.9% year-over-year to $347.90 billion. Its EPS for fiscal 2024 is expected to increase 3.3% year-over-year to $8.92, while its revenue for the same year is expected to decline 2.5% year-over-year to $339.05 billion.
For fiscal 2023 and 2024, MDVL’s EPS is expected to remain negative. Its revenue for fiscal 2023 is expected to decline 93% year-over-year to $3.01 million. Its revenue for fiscal 2024 is expected to increase 128% year-over-year to $6.87 million.
Profitability
CVS’ trailing-12-month revenue is 7,591 times what MDVL generates. CVS is more profitable, with an EBITDA margin and net income margin of 5.81% and 1.19%, compared to MDVL’s negative 94.51% and 119.46%, respectively. Also, CVS’ asset turnover of 1.40x compares to MDVL’s 1.37x.
Valuation
In terms of forward EV/Sales, CVS is currently trading at 0.42x, 11.9% lower than MDVL’s 0.47x. CVS’ trailing-12-month Price/Sales ratio of 0.27x is 48.1% lower than MDVL’s 0.40x. Likewise, CVS’ trailing-12-month Price to Book of 1.21x compares to MDVL’s 4.30x.
Thus, CVS is relatively more affordable.
POWR Ratings
CVS has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, MDVL has an overall rating of D, translating to a Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. CVS has a B grade for Value, in sync with its discounted valuation. MDVL’s stretched valuation justifies its F grade for Value.
Of the five stocks in the Medical – Drug Stores industry, CVS is ranked first, while MDVL is ranked last in the same industry.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Stability, Sentiment, and Quality. Click here to view CVS’ ratings. Get all the ratings of MDVL here.
The Winner
The rapidly aging population and the spread of chronic diseases drive the demand for prescription drugs. Moreover, the Medicare Prescription Drug Inflation Rebate Program will lower drug costs, thereby driving demand for prescription drugs at pharmacies. Although CVS has lowered its adjusted EPS estimate for this year, it will likely benefit from its strategic acquisitions. Moreover, its solid operating cash flow is expected to fuel its growth in the long term.
On the other hand, MDVL sold certain assets of its SpotRx pharmacy services business to CVS to focus on its pharmacy technology business. It is banking on its cost-saving initiatives, top-line growth, and margin expansion to achieve breakeven operating cash flow. However, it still looks some time away from achieving profitability.
Considering these factors, CVS could be a better choice than MDVL.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Medical – Drug Stores industry here.
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CVS shares were trading at $67.64 per share on Monday morning, down $0.03 (-0.04%). Year-to-date, CVS has declined -26.32%, versus a 10.25% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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