Walgreens Boots Alliance (NASDAQ: WBA) and CVS Health (NYSE: CVS) are being left behind as the S&P 500 index chalks up nice gains in 2019. Shares of both big pharmacy retailers are down close to 20% year to date.
Fears about a radical overhaul to the U.S. healthcare system is just one of the issues concerning investors. However, bargain hunters could find the valuations of Walgreens and CVS attractive at current levels. But which stock is the better pick?
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The case for Walgreens Boots Alliance
Let's start with Walgreens Boots Alliance's valuation. Shares currently trade at less than nine times earnings. This is a really low level compared to the company's historical earnings multiples.
CEO Stefano Pessina acknowledged in Walgreens' second-quarter conference call earlier this month that the company faces short-term headwinds, including increasing reimbursement pressures. However, Pessina maintained that Walgreens' "existing strategic priorities are the right ones, and will allow us to deliver sustainable growth into the future."
Those four strategic priorities arguably should put Walgreens in a strong position to deliver solid returns over the long run. The company is accelerating its digitalization efforts, which should enhance customer experience and provide the tools and analytics to boost customer loyalty. Walgreens is transforming its retail offering by beefing up its healthcare products and services. It's working to create "neighborhood health destinations" built around its pharmacies. And the company continues to roll out cost management initiatives to improve margins.
All of these efforts are being undertaken while long-term demographic trends work in Walgreens' favor. Around 10,000 baby boomers in the U.S. reach retirement age every day, according to the AARP. As these Americans age, the demand for prescription and over-the-counter drugs will increase.
These trends are likely an important reason why Pessina remains confident that Walgreens Boots Alliance will be able to return to mid-to-high single-digit earnings-per-share growth in the future. The low end of his range is consistent with Wall Street analysts' projections that the company will boost its earnings by a little over 5% annually on average over the next five years.
Single-digit earnings growth might not excite investors all that much. But combined with Walgreens' solid dividend, which currently yields nearly 2.8%, the stock could deliver attractive total returns.
The case for CVS Health
CVS Health appears to be even more attractively valued than Walgreens. Its shares currently trade at a little over seven times expected earnings.
But can CVS Health grow in the future? CEO Larry Merlo certainly thinks so. Merlo said in the company's Q4 conference call in February that "it has become increasingly evident that the path to long-term growth and value creation lies in the establishment of new, integrated healthcare models that provide consumers better care and convenience at a lower cost." And his plan is for CVS to offer those new, integrated healthcare models.
A key part of that strategy is CVS Health's $78 billion acquisition of large health insurer Aetna. Nearly every company that makes an acquisition touts the potential synergies associated with the deal. CVS is no exception. However, Merlo believes that the addition of Aetna will allow CVS Health to create "a new front door to healthcare."
Like Walgreens, CVS Health is working to focus on higher-margin healthcare products and services. It plans to integrate CVS and Aetna clinical programs to help reduce hospital readmissions. The company is also expanding its MinuteClinic services to better assist patients in managing their chronic diseases.
CVS Health does face one challenge that Walgreens doesn't: The company's pharmacy benefits management (PBM) business is coming under heavy pressure as the Trump administration and members of Congress seek to control rising drug prices. PBMs have been categorized as middlemen who add complexity to the drug pricing process. CVS, though, thinks that the value and savings that its PBM business provides to customers will prove themselves.
Analysts are more optimistic about CVS Health's growth prospects than they are Walgreens', projecting average annual earnings growth of more than 8% over the next five years. CVS Health also claims a higher dividend yield of nearly 3.5%.
The jury is still out as to how well CVS Health can leverage its acquisition of Aetna. However, my opinion is that the deal could put CVS Health in a better long-term position than Walgreens Boots Alliance.
My view is that analysts are right that CVS will grow its earnings at a faster rate than Walgreens will. I think this stronger growth combined with a higher dividend yield makes CVS Health the better buy.
But I'm not especially enamored with either of these stocks right now. There are too many uncertainties for both CVS Health and Walgreens Boots Alliance. There are plenty of better stocks to buy.
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