Earnings

Comparing CVS Health Corporation (CVS) and Aetna Inc. (AET)

CVS Health Corporation (NYSE:CVS) shares are up more than 9.57% this year and recently increased 0.84% or $0.66 to settle at $79.44. Aetna Inc. (NYSE:AET), on the other hand, is up 2.36% year to date as of 01/16/2018. It currently trades at $184.64 and has returned -0.01% during the past week.

CVS Health Corporation (NYSE:CVS) and Aetna Inc. (NYSE:AET) are the two most active stocks in the Health Care Plans industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect CVS to grow earnings at a 4.20% annual rate over the next 5 years. Comparatively, AET is expected to grow at a 10.68% annual rate. All else equal, AET’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 6.43% for Aetna Inc. (AET). CVS’s ROI is 9.90% while AET has a ROI of 7.40%. The interpretation is that CVS’s business generates a higher return on investment than AET’s.

Cash Flow 




The amount of free cash flow available to investors is ultimately what determines the value of a stock. CVS’s free cash flow (“FCF”) per share for the trailing twelve months was +1.55. Comparatively, AET’s free cash flow per share was +3.75. On a percent-of-sales basis, CVS’s free cash flow was 0.88% while AET converted 1.94% of its revenues into cash flow. This means that, for a given level of sales, AET is able to generate more free cash flow for investors.

Liquidity and Financial Risk

CVS’s debt-to-equity ratio is 0.74 versus a D/E of 0.65 for AET. CVS is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CVS trades at a forward P/E of 12.49, a P/B of 2.32, and a P/S of 0.44, compared to a forward P/E of 17.98, a P/B of 3.91, and a P/S of 0.99 for AET. CVS is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. CVS is currently priced at a -7.57% to its one-year price target of 85.95. Comparatively, AET is -5.37% relative to its price target of 195.12. This suggests that CVS is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.10 for CVS and 2.40 for AET, which implies that analysts are more bullish on the outlook for AET.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. CVS has a beta of 0.89 and AET’s beta is 0.60. AET’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. CVS has a short ratio of 3.18 compared to a short interest of 0.81 for AET. This implies that the market is currently less bearish on the outlook for AET.

Summary

CVS Health Corporation (NYSE:CVS) beats Aetna Inc. (NYSE:AET) on a total of 8 of the 14 factors compared between the two stocks. CVS is more profitable, generates a higher return on investment and higher liquidity. In terms of valuation, CVS is the cheaper of the two stocks on an earnings, book value and sales basis, CVS is more undervalued relative to its price target. Finally, RNVA has better sentiment signals based on short interest.

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