Take Care Before Diving Into The Deep End On CVS Health Corporation (NYSE:CVS)

There wouldn't be many who think CVS Health Corporation's (NYSE:CVS) price-to-earnings (or "P/E") ratio of 15.8x is worth a mention when the median P/E in the United States is similar at about 14x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Recent earnings growth for CVS Health has been in line with the market. It seems that many are expecting the mediocre earnings performance to persist, which has held the P/E back. If this is the case, then at least existing shareholders won't be losing sleep over the current share price.

See our latest analysis for CVS Health

If you'd like to see what analysts are forecasting going forward, you should check out our free report on CVS Health.

How Is CVS Health's Growth Trending?

The only time you'd be comfortable seeing a P/E like CVS Health's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered a decent 13% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 70% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 16% per year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 9.6% per year, which is noticeably less attractive.

With this information, we find it interesting that CVS Health is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of CVS Health's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Plus, you should also learn about this 1 warning sign we've spotted with CVS Health.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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