Updated 12:35 PM ET, Wed March 13, 2019
New York (CNN Business)This has been a brutal
year for the big drug store companies.
Walgreens' (WBA) stock
is down more than 10% this year, making it the worst performer in the
Dow. CVS (CVS) has
been an even bigger dud. Its stock has plunged nearly 15% year-to-date. The
broader market is up more than 10% this year.
Both
chains are facing significant challenges, but for different reasons.
Walgreens
has been hit by a crackdown from the Food and Drug Administration, which said
last week that it was putting the company "on notice" for selling
more cigarettes to minors than any other drug store retailer.
The FDA
now wants to meet with Walgreens to discuss the sale of tobacco and
e-cigarettes to teens. The FDA also announced a broader crackdown on flavored e-cigarettes and cigar
sales to kids on Wednesday.
CVS
doesn't have a tobacco problem. The company stopped selling cigarettes in 2014,
citing the fact that carrying tobacco products was "inconsistent"
with the company's broader mission as a health care company.
But CVS
shares have tanked this year because of worries about its recent acquisition
with insurance giant Aetna. CVS CEO Larry Merlo said that 2019 will be "a
year of transition" as the company works to integrate Aetna.
Randy
Hare, director of equity research at Huntington Private Bank, told CNN Business
that lower prices for generic drugs and a persistent decline in reimbursement
rates for medications from state and federal government health care plans is a
problem for both CVS and Walgreens.
That
isn't helping Rite Aid (RAD) either.
That chain, which recently sold a big chunk of its stores to Walgreens,
announced Wednesday that it was cutting 400 jobs and that its CEO was leaving.
Competition hurting both Walgreens and CVS
Hare,
whose firm does not own any of the drug store stocks, said that increased
pharmacy competition from Walmart (WMT) and Amazon (AMZN) is
hurting CVS and Walgreens. Amazon recently bought online pharmacy PillPack.
He
added that the drug store chains are also getting squeezed
by Costco (COST) and
dollar store chains like Dollar General (DG),
which offer a lot of the same products that you can get at the front of a drug
store for much lower prices.
Hare
said that Walgreen looks like it might be in better shape than CVS for the
short-term, mainly because the company doesn't have as much debt as CVS does
following the Aetna purchase.
"It's
the dog with the least fleas," he said, before adding that Walgreens does
face challenges that CVS doesn't -- most notably a bigger presence in sluggish
European markets, because Walgreens also owns UK-based Boots.
Hare
pointed out that Walgreens also still has the FDA tobacco overhang.
"In
the front end of the store they try and kill you and in the back end of the
store they try and save you," he quipped.
CVS may be in better shape as it shifts to insurance
The
broader focus on healthier living might ultimately make CVS the better bet than
Walgreens for the long haul.
Lance
Wilkes, an analyst with Bernstein, started coverage of CVS Wednesday with an
"outperform" rating and argued that all the bad news about
competition in the pharmacy market are already priced into the stock.
Aetna
will account for nearly a third of the company's total sales this year, and
Aetna's growth rate will be faster than the retail and Caremark pharmacy
benefits management businesses, Wiikes said in a report.
CVS is
morphing into a company that's more like insurance giant UnitedHealth (UNH) than
a retailer. That should be good news for investors. UnitedHealth's stock is up
more than 200% in the past five years while CVS has fallen nearly 25%.
https://www.cnn.com/2019/03/13/investing/walgreens-cvs-drug-stores-stocks/index.html
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