We believe that CVS Health Stock (NYSE: CVS) currently seems like an attractive choice over its counterpart Target inventory (NYSE:TGT) due to its comparatively lower valuation and better outlook. CVS trades at around 0.5x trailing revenue, compared to 0.9x for TGT. Although both companies have seen increased revenue in recent quarters, growth has been better for CVS, helped by the overall economic recovery and an increased contribution from the administration of the Covid-19 vaccine.

In terms of stock returns, CVS, with returns of 21% over the past six months, has significantly outperformed TGT, which is down around 8%, and it has also outperformed the broader markets, given a 4% decline for the S&P500 index. However, there is more to the comparison, and we think CVS stands out with much higher expected returns than TGT, as discussed in the sections below. We compare a host of factors such as historical revenue growth, returns and valuation multiple in an interactive dashboard analysis CVS Health vs. Target: Which stock is a better bet? Parts of the analysis are summarized below.

1. Target revenue growth was stronger

  • Both companies have managed to post sales growth in recent quarters, but Target has seen relatively faster revenue growth of 17% in the last twelve months, compared to 7% for CVS Health. Over a longer period, CVS Health’s sales have fallen from $194 billion in 2018 to $285 billion in the last twelve months, while Target’s revenues have fallen from $75 billion to $103 billion. during the same period.
  • Target saw increased spending in attractive categories such as apparel, toys and home furnishings. The company also benefited from its drive-up, in-store pickup and same-day delivery services through Shipt services.
  • For CVS Health, revenue growth was partly driven by increased demand for Covid-19 testing and vaccine delivery in 2020 and 2021.
  • Our CVS Health Income and Target revenue dashboards provide more detail on business segments.
  • Going forward, CVS Health’s revenue is expected to grow at a faster rate compared to Target. The table below summarizes our revenue forecast for CVS and TGT over the next three years and indicates a CAGR of 11% for CVS Health, compared to a CAGR of only 2% for Target.
  • Note that we have different methodologies for companies negatively impacted by Covid and for companies not impacted or positively impacted by Covid when forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to predict recovery at the pre-Covid revenue growth rate. Beyond the recovery point, we apply the average annual growth observed the three years preceding the Covid to simulate the return to normal conditions. For companies with positive revenue growth during Covid, we consider pre-Covid average annual growth with some growth weight during Covid and past twelve months.

2. CVS Health is more profitable but carries a higher risk

  • CVS Health’s operating margin of 2.5% over the past twelve months is in line with Target’s 2.3%.
  • If we look at recent margin growth, both companies have seen declines, but CVS Health is marginally better, with margin change last twelve months vs last three years at -2.5%, versus -4 .6% for Target.
  • When it comes to financial risk, Target beats CVS Health. Target’s 13.2% debt as a percentage of equity is well below CVS Health’s 42.4%, and its 10.6% cash as a percentage of assets is higher than CVS’s 5.5%, which implies that Target has a better debt and cash position.

3. Filet of Everything

  • We see revenue growth has been better for Target and it comes with less risk. On the other hand, CVS Health is available at a lower valuation than Target.
  • Now, looking at the outlook, using P/S as a base, due to the large swings in both P/E and P/EBIT, we believe CVS Health is currently the better choice of the two. The table below summarizes our revenue and return forecasts for CVS and TGT over the next three years and indicates an expected return of 25% for CVS over this period versus an expected return of -9% for TGT, implying that investors would be better off buying CVS. on TGT, based on Trefis Machine Learning analysis – CVS Health vs. Target – which also provides more detail on how we arrive at these numbers.

While CVS stock may outperform TGT, the Covid-19 crisis has created many price discontinuities which may provide interesting trading opportunities. For example, you’ll be surprised how counter-intuitive stock valuation is to Walmart vs. Ingevity.

What if you were looking for a more balanced portfolio instead? here is a quality portfolio which has consistently beaten the market since late 2016.

Return March 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
Back SVC 1% 2% 33%
Back TGT 12% -3% 210%
S&P 500 return -1% -9% 93%
Performance of the Trefis MS portfolio -2% -12% 245%

[1] Monthly and year-to-date cumulative as of 7/3/2022
[2] Cumulative total returns since the end of 2016

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