Which stock wins in a battle between these pharmacy giants?
Keith
Speights Sep 22, 2019 at 7:00AM
As Bob Dylan once sang, "the times they are
a-changin'." That's especially true today for the retail pharmacy
industry. Acquisitions and new competitive threats have altered the landscape
for pharmacy giants Walgreens Boots Alliance (NASDAQ:WBA) and CVS Health (NYSE:CVS).
CVS Health appears to be weathering these
changes better than Walgreens based on the year-to-date performance of the two
stocks. But which of these stocks is the better long-term pick for investors?
Here's how CVS Health and Walgreens Boots Alliance stack up against each other.
Growth prospects
Wall Street analysts don't expect either of
these two companies to generate sizzling growth over the next few years. The
consensus analysts' estimate for Walgreens Boots Alliance is for an anemic
1.66% average annual earnings growth rate. Analysts are a little more
optimistic about CVS Health, projecting average annual earnings growth of
3.25%.
Both companies face continued headwinds from a
tough reimbursement climate. However, CVS Health appears to be addressing those
challenges better than Walgreens is, at least so far.
In its latest quarter, CVS Health reported year-over-year revenue growth of 35.2%,
boosted by its acquisition of Aetna, along with adjusted earnings per share
(EPS) growth of 11.8%. Walgreens announced a slight year-over-year revenue
increase of 0.7% in its most recent quarterly update. The company's adjusted
EPS beat analysts' expectations but still
fell by 4% year over year.
CVS Health thinks that the addition of Aetna
will enable it to, in the words of CEO Larry Merlo, "fundamentally
transform the consumer health experience." The company plans to roll out
new products and services that will help more effectively control healthcare
costs. My view is that Aetna gives CVS Health an advantage over Walgreens in
generating growth.
Dividends
It's a close contest between Walgreens Boots
Alliance and CVS Health when it comes to dividends. Walgreens' dividend yield currently stands at 3.36%
compared to a 3.16% yield for CVS Health.
Walgreens also appears to be in a better
position to increase its dividend. The company is currently using less than 35%
of its earnings to fund the dividend program, while CVS Health is using over
56% of its earnings on paying dividends.
CVS Health suspended its annual dividend
increases with the acquisition of Aetna. As a result, Walgreens is more likely
to increase its dividend over the next few years.
Valuation
Which of these two pharmacy stocks is more
attractively valued? It depends on the metric that you use.
CVS Health is a little less expensive based on
forward-looking price-to-earnings (P/E). Its forward earnings multiple of 8.84
is well below the 9.1 multiple for Walgreens Boots Alliance. Walgreens,
however, looks more attractive using enterprise value-to-EBITDA (earnings before interest, taxes,
depreciation, and amortization), with a multiple of 9.21 to CVS Health's 11.21.
In my view, the tiebreaker is growth. CVS Health
has better growth prospects, so it appears to have an edge in valuation.
Better buy
Although CVS Health's dividend isn't as strong
as Walgreens' dividend is, the stock looks more appealing based on its growth
prospects and its valuation. I also think that CVS Health has been more
innovative than Walgreens in responding to the potential threat from Amazon.com,
which could shake things up in the retail pharmacy market in the future.
That being said, Walgreens has shown that it can
think outside of the box. For example, it recently announced the testing of
drone delivery of products with Wing, a subsidiary of Alphabet.
Customers will be able to order from 100 items and have the products delivered
to their doorsteps within five to 10 minutes.
Still, I think that CVS Health is the better
pick over Walgreens at this point. However, I'm not a fan of either
stock. Investing in healthcare stocks comes with
plenty of risks, with the potential for major drug pricing changes a big one
right now. CVS Health relies on its pharmacy benefits management (PBM) business
for over half of its total revenue. PBMs could be squeezed in the future with
politicians seeking to lower drug prices.
My view is to sit on the sidelines with both of
these pharmacy stocks. There are simply too many other stocks to consider that
have better growth prospects, better dividends, and better valuations.
10 stocks we like better than Walgreens Boots
Alliance
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John Mackey, CEO of Whole Foods Market, an
Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne
Frey, an executive at Alphabet, is a member of The Motley Fool's board of
directors. Keith Speights owns shares of Alphabet (A
shares). The Motley Fool owns shares of and recommends Alphabet (A shares),
Alphabet (C shares), and Amazon. The Motley Fool recommends CVS Health. The
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