CVS: Coronavirus Testing, Vaccinations Likely To Keep Boosting Shares
Geoff Considine, Ph.D | Nov 10, 2021 07:48AM ET
CVS Health Corp's (NYSE:CVS) Q3 EPS, reported on Nov. 3, beat consensus expectations by almost 11%. Since closing at the YTD high of $96.34 on that day, the shares have fallen slightly.
CVS has benefited calculates the Wall Street consensus outlook from the views of 29 analysts. The consensus rating is bullish and the consensus 12-month price target is 9.1% above the current price.
Source: Investing.com
While there is a notable difference in the 12-month consensus price targets, E-Trade and Investing.com agree that the consensus rating for CVS is bullish. The average of E-Trade’s and Investing.com’s 12-month price targets is 12.25%. Combined with the 2.1% dividend yield, the consensus for expected total return is 14.35%. This expected return is well above the annualized returns over the past 3-, 5-, 10-, and 15-year periods.
Market-Implied Outlook for CVS/h2
I have analyzed the prices of call and put options at a range of strike prices, all expiring on Jan. 21, 2022, to generate the market-implied outlook for CVS for the next 2.4 months (from now until that expiration date). I have also analyzed options expiring on June 17, 2022 to calculate the market-implied outlook for the next 7.2 months.
The standard presentation of the market-implied outlook is in the form of a probability distribution of price return, with probability on the vertical axis and return on the horizontal.
Source: Author’s calculations using options quotes from E-Trade
The market-implied outlook for CVS for the next 2.4 months is generally symmetric, without a well-defined peak in probability tilted to either positive or negative returns. The annualized volatility calculated from this distribution is 25.5%.
To make it easier to directly compare the relative probabilities of positive and negative returns, I rotate the negative return side of the distribution about the vertical axis (see chart below).
Source: Author’s calculations using options quotes from E-Trade. The negative return side of the distribution has been rotated about the vertical axis.
This view shows that the probabilities of positive and negative returns of the same magnitude are almost identical for most outcomes (the solid blue line and the dashed red line are very close to one another), although there are slightly-elevated probabilities of small-magnitude negative returns for this period.
Theory suggests that the market-implied outlook is expected to have a negative bias because investors, in aggregate, are risk averse and thus tend to overpay for put options. Considering this bias, having such similar market-implied probabilities of positive and negative returns is interpreted to be neutral to slightly bullish.
The market-implied outlook to June 17, 2022 is very similar to the 2.4-month outlook, with comparable probabilities of positive and negative returns of the same magnitude. The annualized volatility calculated from this outlook is 27.3%. This market-implied outlook is neutral to slightly bullish.
Source: Author’s calculations using options quotes from E-Trade. The negative return side of the distribution has been rotated about the vertical axis.
The current market-implied outlooks for CVS to early and mid 2022 are neutral with a slight bullish tilt and expected annualized volatility of around 26.5%. Back in April, the market-implied outlook to early 2022 was bearish, with a pronounced tilt in probabilities favoring negative returns. The options market outlook for CVS has improved substantially.
Summary/h2
CVS is competing in a rapidly-changing health services business by providing insurance, clinics, and maintaining a pharmacy.
COVID-19 provided a boost to earnings that will continue for some period of time.
The Wall Street consensus rating continues to be bullish and the consensus 12-month outlook is for expected total return of about 14.4%. As a rule of thumb for a buy rating, I want to see an expected 12-month return that is at least half the expected volatility.
With the expected volatility of about 26.5% from the market-implied outlook, CVS meets this criterion. The market-implied outlook is neutral with a slight bullish tilt. Considering the strong earnings growth in recent quarters, the Wall Street consensus outlook, and the substantially-improved market-implied outlook, I am changing my rating on CVS to bullish.
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