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Pharmacies & Drug Stores Industry Boasts Bright Prospects

Urmimala Biswas

The Zacks Retail - Pharmacies and Drug Stores industry essentially includes retailing of a range of prescription and over-the-counter medications. The broad retail network of companies within this industry deliver advanced health solutions to patients, customers and caregivers. Their pharmacies dispense millions of prescription medications each year.  

Over the past few years, the scope of retail pharmacy and drugstore market has expanded exponentially. In North America, some of these companies have evolved to add wellness products and groceries to their traditional portfolio of prescription and over-the-counter medications.

The Retail - Pharmacies and Drug Stores industry is known for heavy consolidation. Going by a small business chronicle report, Walgreens Boots (WBA), CVS Health (CVS) and Rite Aid (RAD) are commonly referred to as the "big three" in the drugstore space. However, with e-commerce giant Amazon’s (AMZN) foray into the healthcare space along with other non-healthcare mammoths like Berkshire Hathaway Inc. and JPMorgan, the nature of the traditional retail pharmacy and drugstore industry is gradually changing.

Here are the three major industry themes:

Elderly Population in Focus: The American population is experiencing a major demographic shift with a significant increase in the aging population (65 and above). Naturally, the federal health insurance program is gaining importance. Per 2018 data, the Medicare Part D program, implemented in 2006, has more than 43 million participants, largely comprising the elderly population. Going by a Robert Walthall report, which was published in Shelving Design Systems, seniors are expected to fill nearly 30 prescriptions a year at retail pharmacies compared to about half by individuals aged between 19 and 64. Pharmacy retailers are gradually realizing this huge and growing market demand for Medicare plan options. According to Walthall, pharmacy retail behemoths are currently striving to create relationships with physicians and health centers that prescribe medicines to seniors.

Beauty and Lifestyle Exposure: With an increase in e-commerce and social media participation in brand expansion, there has been a major change in consumer behavior. Consumers do not hesitate to try different brands based on product reviews on different channels. With this transformation, luxury and necessary lifestyle and wellness brands are emerging as a billion-dollar industry. Pharmacy retailers are also jumping on the bandwagon by joining forces with independent lifestyle and cosmetic brands. In the recent years, drug retailers like CVS Health and Walgreens have made significant efforts to update their beauty offerings. According to an article published in Retail Dive, these two companies currently have an astonishing 48.8% combined market share of the U.S. health and beauty retail market.

Emphasis on Chronic Disease Care: The modern pharmacy retail and drugstore concept emphasizes on chronic disease care and management. Irrespective of age group, millions of Americans are at present suffering from chronic conditions that require lifestyle modifications and daily maintenance medications. These include Type I and Type II diabetes, heart diseases and dementia such as Alzheimer’s. Per current data, a very small percentage of the population takes medication as prescribed and tries to make positive changes in their lifestyle, exerting additional pressure on the healthcare system. According to the Centers for Disease Control and Prevention (CDC), three in four aging Americans have multiple chronic conditions, clearly indicating the huge untapped market for pharmacy retailers dealing in chronic condition management. Keeping this in mind, CVS Health recently acquired Aetna while Walgreens is set to take over Alphabet’s (GOOGL) Verily.

Zacks Industry Rank Indicates Strong Near-Term Scenario

The industry’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid near-term prospects. The Zacks Retail - Pharmacies and Drug Stores industry, which is housed within the broader Zacks Retail and Wholesale sector, currently carries a Zacks Industry Rank #107, which places it in the top 42% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate.

Industry Outperforms S&P 500 & Sector

The Zacks Retail - Pharmacies and Drug Stores industry has outperformed the Zacks S&P 500 composite as well as its own sector over the past three months. The stocks in this industry have collectively increased 11% over this period while the Food/Drug-Retail and Wholesale Sector has moved up 6.8%. The Zacks S&P 500 composite has increased 2.1% over the same period.

Three-Month Price Performance

Industry’s Current Valuation

One might gain a fair idea of the industry’s relative valuation from its price-to-earnings ratio (P/E ratio), which is commonly used for valuing retail pharmacy and drug store companies.

The industry is currently trading at a forward 12-month P/E ratio of 8.92, which is lower than its median level of 14.39 over the past five years. We also see that the industry is trading lower than the broader industry’s forward P/E ratio of 18.89.

Price-to-Earnings Forward Twelve Months (F12M)

Comparing the industry with the S&P 500 Index on the basis of the forward P/E ratio, we see that the industry is trading at a discount to the S&P 500’s 16.92.

Price-to-Earnings Forward Twelve Months (F12M)

Bottom Line

Going by Statista data, sales of retail pharmacies and drug stores in the United States will reach approximately $300.26 billion by 2020. The enormous market potential has made this space a happy hunting ground for global healthcare players.

So far, the bigger retail pharmacy and drug store companies have been maintaining their competitive position on economies of scale in purchasing and access to a large customer base. Players like CVS Health, Walgreens Boots and others have already started to add more digital and customer-friendly programs to their business. These companies have incorporated mail order pharmacy models to their stores with same day/one day to two days delivery programs. Meanwhile, smaller companies are competing effectively through convenient locations or special merchandising.

Amazon’s entry into drug distribution is considered to be a game changer but the immediate implications will be limited, given that the healthcare space is highly complex and regulated. Keeping the long-term expectations in mind, investors can take advantage of the cheap valuation and bet on a few Retail - Pharmacies and Drug Stores stocks that have a strong earnings outlook.

Stocks to Buy

Here we have picked two stocks from the Retail - Pharmacies and Drug Stores industry, which carry a Zacks Rank 2 (Buy) and have seen positive earnings estimate revisions.

CVS Health Corporation: Headquartered in Woonsocket, RI, CVS Health is a pharmacy innovation company with integrated pharmacy care offerings. The Zacks Consensus Estimate for 2019 EPS has moved up 1.8% in the past 60 days. CVS Health has returned 17.9% over the past six months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

CVS Health Corporation Price and Consensus

Walgreens Boots Alliance, Inc.: Founded in December 2014, Walgreens Boots Alliance is the world’s first pharmacy-led, health and wellbeing enterprise. The company boasts the largest global pharmaceutical wholesaler and distribution network. In addition, Walgreens Boots Alliance is the world's largest purchaser of prescription drugs and several other health and wellbeing products. The Zacks Consensus Estimate for fourth quarter fiscal 2019 earnings has moved up 0.7% in the past 30 days. Walgreens Boots has returned 9.9% over the past month.

Walgreens Boots Alliance Price and Consensus

 

Investors may also hold on to the following stock that holds strong long-term growth potential.

GNC Holdings, Inc. (GNC): Headquartered in Pittsburgh, PA, GNC Holdings  is a leading global specialty retailer of products for health and wellness, including vitamins, minerals, and herbal supplement, sports nutrition and diet. GNC Holdings, a Zacks Rank #3 (Hold) stock, has returned 3.4% year to date. The company’s long-term expected earnings growth rate is pegged at 19%.

GNC Holdings Price and Consensus

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Walgreens Boots Alliance, Inc. (WBA) : Free Stock Analysis Report
 
Rite Aid Corporation (RAD) : Free Stock Analysis Report
 
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