Health services provider CVS Health Corporation (CVS) has lost 9.9% over the past month amid the broader market sell-off. However, the healthcare sector’s resilience to uncertain economic conditions and the company’s solid fundamentals have helped the stock deliver 8.8% returns over the past year.

On the other hand, pharmacy retailer Walgreens Boots Alliance, Inc. (WBA) could not survive the challenges faced by the market well and lost 31.6% over the past year. The company’s poor fundamentals are the key reason behind its underperformance.

WBA’s sales came in at $32.45 billion for the quarter ended August 31, 2022, down 5.3% year-over-year. Its net loss came in at $415 million compared to an income of $627 million a year ago. Its loss per share came in at $0.48 compared to an EPS of $0.72 in the year-ago period.

Given CVS’ fundamental strength, Wall Street analysts expect the stock to hit $122.31 in the near term, indicating a potential upside of 33%, which is much higher than what WBA could see.

Here is what could shape CVS’ performance in the near term:

Solid Financials

CVS’ total revenues increased 11% year-over-year to $80.64 billion for the second quarter ended June 30, 2022. Its net income came in at $2.95 billion, up 6% year-over-year, while its EPS came in at $2.23, up 6.2% year-over-year. Moreover, its operating income came in at $4.57 billion, up 5.6% year-over-year.

Attractive Valuations

CVS’ forward EV/Sales of 0.57x is 84.9% lower than the industry average of 3.80x. Its forward EV/EBITDA of 8.94x is 31% lower than the industry average of 12.94x. Also, its forward Price/Sales of 0.39x is 91.2% lower than the industry average of 4.38x, while its forward Price/Book of 1.51x is 40.2% lower than the industry average of 2.53x.

Robust Profitability Margins

CVS’ trailing-12-month EBITDA margin of 6.14% is 86.4% higher than the industry average of 3.29%. Its trailing-12-month net income margin of 2.66% is higher than the negative industrial average of 2.69%.

In addition, its trailing-12-month ROCE, ROTC, and ROTA of 11.00%, 5.96%, and 3.55%, compared with the industry averages of negative 38.60%, 21.31%, and 29.63%, respectively.

POWR Ratings Reflect Promising Outlook

CVS has an overall rating of A, which equates to a Strong Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

The stock has a B grade for Growth, consistent with its solid financials in the latest reported quarter. It has a B grade for Stability, in sync with its beta of 0.71.

In the 4-stock Medical – Drug Stores industry, CVS is ranked first.

Click here for the additional POWR Ratings for CVS (Value, Momentum, Sentiment, Quality).

View all the top stocks in the Medical – Drug Stores industry here.

Bottom Line

While WBA delivered a poor performance in the last reported quarter, CVS’ financials have witnessed stable growth. Moreover, CVS’ revenue is expected to increase 6.9% year-over-year to $312.35 billion in 2022. Its EPS is estimated to grow 6.2% per annum for the next five years.

Given the stock’s sturdy financials and robust profitability, I think CVS could be a better Buy than WBA.

CVS shares were unchanged in after-hours trading Wednesday. Year-to-date, CVS has declined -9.69%, versus a -21.52% rise in the benchmark S&P 500 index during the same period.

Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries.

More...