After An 8% Decline Is CVS Health A Better Buy Than Kroger?

The retail pharmacies have not been immune to the current coronavirus crisis, although they have fared somewhat better than the broader markets. While CVS Health (NYSE:CVS) has declined -8% since early February, after the WHO declared the coronavirus a global health emergency, Kroger (NYSE:KR) stock has fared much better and it gained 18% over the same period. We believe that CVS Health stock will likely outperform Kroger’s stock over the coming months. Our conclusion is based on our detailed dashboard analysis, ‘Is CVS Health Expensive Or Cheap After An -8.5% Move Vs. Kroger?’, wherein we compare trends in key metrics for the two retail pharmacies to determine their relative valuations under the current circumstances. We summarize parts of this analysis below.

Why Has Kroger Outperformed CVS Health Over Recent Weeks?

CVS Health derives over 70% of its revenues from health care and pharmacy services, which could see an impact from higher unemployment, as more people enroll for Medicaid. For CVS, the employer insurance is more profitable compared to Medicaid. Kroger, on the other hand, derives its revenues from retail sales at its supermarkets, which has seen a surge in demand, as people started stocking ahead of restrictions on movement being implemented. Over 80% of its supermarkets have pharmacies. Though pharmacy accounts for only 9% of Kroger’s sales, compared to 30% for CVS Health. 

CVS Health’s current P/E multiple based on 2019 earnings has declined from 10.6x in 2019 to 8.7x currently, while Kroger’s multiple has increased from 13.2x to about 14.4x. Kroger’s multiple still appears high, considering that the company’s revenues and margins are also at risk, with low footfall in the near term. Even after restrictions are eased, it could take some time for footfall to come back to the usual levels, though a shift towards food at-home will help supermarkets at large. Moreover, Kroger’s P/E is still about 10% higher than the 13x multiple it traded at over 2017-19, implying that the stock could be vulnerable. 

Overall, it’s likely that CVS Health stock will outperform Kroger going forward, which is yet to see a meaningful correction to its P/E multiple through the current crisis. We believe that the ground reality for Kroger will likely be confirmed during its Q2 results, after the surge seen in demand over the recent months fade, especially if no containment exists at the time of earnings. 

CORONAVIRUS CRISIS: Since early February, CVS Health stock has declined -8% compared to +18% for Kroger

• CVS Health’s stock has declined by about -8.5% since early February, compared to 18.3% growth for Kroger, after the WHO declared a global health emergency relating to coronavirus.
• CVS Health’s stock declined -3.3% while Kroger’s stock is down -1.3% since March 8th, as the U.S. cases accelerated.

HISTORICAL PERFORMANCE: From 2009-2019 CVS Health stock has grown at 0.8x the rate of Kroger

• CVS Health stock went from $26.37 at the end of 2009 to $73.18 at the end of 2019, representing a significant change of 177.5%.
• During the same time period, Kroger went from $8.58 to $28.83 representing a change of 236%.
• This implies that CVS Health stock grew at 0.8x the rate of Kroger.

ANALYSIS: Is CVS Health stock expensive based on a review of the fundamentals?

• P/E Ratio: Based on current P/E ratios, CVS stock looks attractive compared to prior years, as well as compared to Kroger. CVS Health’s current P/E multiple (based on 2019 results) stands at about 8.7x, compared to about 14.4x for Kroger.
• Historical Revenue Growth: CVS Health 2014-19 annualized revenue growth of 10.7% is 5.3x that of the 2014-19 Kroger annualized revenue growth rate of 2.0%. CVS Health’s outperformance can largely be attributed to the year 2019, which included the sales from Aetna acquisition.
• Historical EPS Growth: CVS Health 2014-19 annualized Non-GAAP EPS growth of 8.9% is 2.2x that of the 2014-19 Kroger annualized EPS growth rate of 4.1%.
• Total Debt Comparisons: CVS Health’s Total Debt has increased from $42.1 billion to $52.1 billion between 2016 and 2019. In comparison, Total Debt for Kroger has remained around $14.1 billion.