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Pharmacies & Drug Stores Industry Outlook: Prospects Mixed

Urmimala Biswas

The Zacks Retail - Pharmacies and Drug Stores industry essentially includes retailing of a range of prescription and over-the-counter medications. This is distinctively different from the concept of hospital pharmacy wherein drugs are usually sold strictly under the prescription of hospital doctors.

The broad retail network of companies within retail pharmacy industry delivers 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 entities 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 consolidations. 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, the non-healthcare leaders like Amazon (AMZN), JP Morgan (JPM) and Berkshire Hathaway, which are at the outset of floating major healthcare ventures, by and large affected the business of the Retail - Pharmacies and Drug Stores players.

Here are the industry’s three major themes:

Traditional Brick-and-Mortar Nature of Drug Retail Transforming: With e-commerce giant Amazon’s big move to foray into the healthcare space, the retail pharmacy industry entered a new phase of fierce competition. However, the existing players in the drugstore industry are unlikely in a mood to give up and lose their turf. To counter this rivalry, the companies operating in the space are strategically attempting to gain in size and scale, both organically and inorganically.

Walgreens recently inked a number of deals to diversify its product offerings and strengthen its retail pharmacy business. The company is currently focusing on its front-end stores’ expansion and announced partnerships with the likes of Kroger and FedEx. While CVS Health adopted the growth-by-acquisition policy to defy all odds (through vertical integration by acquiring health insurance giant Aetna). Rite Aid’s merger with Albertsons is another notable step in this direction, indicating that these companies are gradually bracing up for facing the radical changes.

Emphasis on Chronic Disease Care: The modern pharmacy retail and drugstore concept stresses on chronic disease care and management. Irrespective of age group, millions of Americans are at present suffering 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 bring positive changes in their lifestyle, exerting additional pressure on the healthcare system. Per the Centers for Disease Control and Prevention (CDC), three in four aging Americans are afflicted with multiple chronic conditions, clearly indicating the hugely untapped market for pharmacy retailers dealing with chronic condition management. Keeping this in mind, CVS Health recently acquired Aetna while Walgreens is currently working with Alphabet’s (GOOGL) life sciences and health care segment Verily.

Drug Cost Inflation Continues: Going by a January 2020 Fortune report, more than 3,400 prescription drugs’ prices have been hiked in the first six months of 2019, reflecting a 17% increase from the year-earlier tally. This, in turn, induces patients to replace prescription medicines with low-cost generic drugs. The trend largely hurt the business of the likes of Walgreens through 2019. Meanwhile, 3 Axis Advisors predicts that in 2020, nearly 500 prescription drugs will be costlier as drugmakers proceed with price increases averaging 5% (published in in-pharmatechnologistarticle).

Zacks Industry Rank Indicates Bright Near-Term Prospects

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, housed within the broader Zacks Retail and Wholesale sector, currently carries a Zacks Industry Rank #76, placing it in the top 30% 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 Underperforms S&P 500 & Sector

The Zacks Retail - Pharmacies and Drug Stores industry has underperformed the Zacks S&P 500 composite as well as its own sector over the past three months. The stocks in this industry have collectively dropped 6.4% over this period while the Food/Drug-Retail and Wholesale Sector has moved up 0.3%. The Zacks S&P 500 composite has increased 5.2%.

Three-Month Price Performance

Industry’s Current Valuation

One might derive 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 9.17, lower than its median level of 13.75 over the past five years. We also see that the industry is trading lower than the broader industry’s forward P/E ratio of 18.34.

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 18.15X.

Price-to-Earnings Forward Twelve Months (F12M)

Bottomline

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

In this regard, according to 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 made this space a happy hunting ground for global healthcare players.

Stocks to Buy

Rite Aid Corporation: This is the third largest retail drugstore in the United States, based on revenues and the number of stores. Recently, the company delivered the sixth straight quarter of higher prescription count growth for third-quarter fiscal 2020. This improvement was backed by increased immunizations and sturdy clinical pharmacy services. The Zacks Consensus Estimate for fiscal 2020 earnings has moved 183% north in the past 60 days. Rite Aid, a Zacks Rank #1 (Strong Buy) stock, has returned 13.2% in the past three months.

Investors may also hold on to the following stocks that promise a robust long-term growth potential.

Rite Aid Price and Consensus

CVS Health Corporation: Headquartered in Woonsocket, RI, this industry player is a pharmacy innovation company with integrated offerings across the entire spectrum of pharmacy care. The Zacks Consensus Estimate for current-year earnings has been revised 0.7% upward in the past 90 days. CVS Health, a Zacks Rank #3 (Hold) stock, has rallied 22.8% in the past six months.

CVS Health Price and Consensus

Herbalife Nutrition Ltd. (HLF): Based in Los Angeles, CA, Herbalife develops and sells nutrition solutions to consumers interested in weight management and general wellness programs. It also caters to customers looking for ways to enhance their sports and fitness performances. Herbalife has been gaining from its focus on direct selling, which it believes, fits the bill for its business.

The stock has inched up 4.2% in the past six months and carries a Zacks Rank of 3.

Herbalife Price and Consensus

 

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Walgreens Boots Alliance, Inc. (WBA) : Free Stock Analysis Report
 
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