May 21, 2015
With the dollar, healthcare costs and consumer sentiment all on the rise, there is an industry that is the crux of these three powerful trends. I'm talking about pharmacies and drugstores. The U.S. drugstore business brings in over $260 billion annually, and it's growing at a solid 1.2% clip each year. That's a lot of antacid and ibuprofen. So today let's look at three of the nation's top drugstore chains and see which one I'll write a prescription for.
CVS Health Corp. (CVS) may be the second-largest drugstore chain in the U.S. for now, but that may not last for long. Just today, CVS Health announced plans to acquire Omnicare, the largest provider of long-term care pharmacy services. With a sticker price of $12.7 billion, the deal includes Omnicare's 160 locations across the U.S. Omnicare has three decades of experience in serving the senior care industry, so this acquisition will help CVS Health better serve the growing baby boomer population. CVS Health expects the deal to add $0.20 to adjusted EPS in 2016.
This deal builds upon an already strong base for sales and earnings. Earlier this month, CVS announced that first-quarter revenues increased 11.1% and net earnings rose 8% over a year ago. Looking ahead to FY 2015, CVS Health expects adjusted earnings from continuing operations between $5.08 and $5.19 per share.
CVS Health also knows how to treat its shareholders. It has a decent dividend yield of 1.37% and an annual payout of $1.40 per share. The company is also in the process of a whopping $10 billion share repurchase program, which is always a good sign of a strong stock. CVS is an A-rated Strong Buy.
CVS Health Corp.'s top competitors are Walgreens Boots Alliance (WBA) and Rite Aid Corp. (RAD), so let's see how they stack up against each other.
Now, you'll see that WBA also earns an A in Portfolio Grader, but there are a few reasons that I prefer CVS. First, CVS has higher forecasted earnings growth. Last December, Walgreens acquired Switzerland's Alliance Boots, so costs associated with the merger will weigh on earnings over the next several quarters. Walgreens Boots Alliance plans to reduce costs by $1.5 billion over the next three years, but there are going to be some growing pains in the meantime.
Second, WBA has a higher forward P/E ratio (19) than CVS (17), which means that it is slightly overvalued compared with forecasted earnings. Third, while CVS is leading the industry with its $10 billion share repurchase program, Walgreens has been disappointing investors with its $3 billion program. While WBA is a solid buy in its own right, I consider CVS to be the superior stock.
Meanwhile, Rite Aid Corp. is the weakest out of the three in terms of buy pressure, and to add insult to injury it doesn't have any stock buyback program to speak of. Rite Aid also does not pay any sort of dividend to its investors. The company does have decent fundamentals, meeting or exceeding analysts' estimates with earnings, but that's not enough to consider this stock a good buy. Rite Aid was recently downgraded from a B-rated buy to a C-rated hold in Portfolio Grader. For the current quarter, analysts estimate per share earnings of $0.04 and an average revenue estimate of $6.68 billion. This translates to a 25% year-on-year drop in earnings and just 3.4% sales growth. RAD is a C-rated Hold.
As you can see, CVS is the strongest stock, with excellent buying pressure and a much more consistent track record than its competitors.