Buy Walgreens Over CVS?

Based on historical performance, Walgreens Boots Alliance (NASDAQ:WBA) appears to be an attractive bet compared to CVS Health (NYSE:CVS) in the current crisis. The current coronavirus crisis will likely impact retail pharmacists due to supply chain disruptions. On the positive side, the retail pharmacy stores are open across the globe, while most of the other stores aren’t in the lockdown, given that access to medication is an essential. Beyond medicines, stores such as Walgreens also sell many of the daily use staples, which will likely aid its retail sales. Moreover, the company recently announced it will provide COVID-19 test spaces at some of its stores. Walgreens will report its Q2 fiscal 2020 earnings on Thursday April 2, 2020, and it could see around a 2% jump in top line, though bottom line could decline 11% to $1.46 per share on an adjusted basis, according to the consensus estimates.

The healthcare stocks usually are defensive plays in times of financial crisis, which explains the outperformance of these stocks vis-a-vis the S&P 500, which has declined around 20% since early February. While the outlook for both companies remains strong, as both the companies have seen more or less similar growth over the past few years, we believe Walgreens could be a better bet in the current environment. Walgreens pharmacy sales as well as retail sales could help it cope better than CVS Health, which could potentially face some pressure due to cost waivers related to COVID-19 in the near term.

Our analysis, Is Walgreens Expensive Or Cheap Compared To CVS Health After Declining Over -10%? compares the stock price performance and fundamentals of Walgreens Boots Alliance and CVS Health over the last few years.

CORONAVIRUS CRISIS: Since early February, Walgreens stock has declined -9% compared to -12% for CVS Health.

• Walgreens stock has declined by about 9% since early February, compared to 12% for CVS, after the WHO declared a global health emergency relating to coronavirus.
• Walgreens stock declined 9% while CVS’ stock is down 7% since March 8th, as U.S. cases accelerated.

HISTORICAL PERFORMANCE: From 2009-2019 Walgreens stock has grown at 0.4x the rate of CVS Health

• Walgreens Boots Alliance, stock went from $33 at the end of 2009 to $58 at the end of 2019, representing a change of 79.1%.
• During the same time period, CVS Health went from $27 to $74 representing a change of 177.5%.
• This implies that Walgreen Boots Alliance, Inc. stock grew at 0.4x the rate of CVS Health.
• Walgreens stores in U.K. have been facing pressure from discount retailers, as well as online retailers, and this impacted the company’s overall performance over the past few quarters. This led to a decline in Walgreens stock.
• Our analysis on Walgreens Expenses, highlights various expense drivers, which impacted the company’s margins over the recent years.

ANALYSIS:

How do valuations for Walgreens and CVS Health compare, based on the review of fundamentals?

• P/E Ratio: Based on trailing 2019 P/E ratios, both Walgreens and CVS Health stocks look attractive compared to prior years, through Walgreens looks slightly attractive compared to CVS as well.
• Walgreens as well as CVS Health’s current P/E multiple (based on 2019 results) stands at about 8x.

Historical Revenue and EPS Growth: While CVS Health saw higher revenue growth, Walgreens posted better EPS growth between 2014 and 2019

• Walgreens 2014-19 annualized revenue growth of 10% is 0.9x that of the 2014-19 CVS Health’s annualized revenue growth rate of 11%.
• Walgreens 2014-19 annualized adjusted EPS growth of 10.5% is 1.2x that of the 2014-19 annualized adjusted EPS growth rate of 8.9% for CVS Health.

Conclusion

Both the companies’ stocks have been more resilient through the crisis, thus far, and Walgreens could see a larger upside if the health crisis abates, considering its EPS growth has been higher than CVS Health. Also, Walgreens is less leveraged compared to CVS Health. Walgreens P/E ratio is lower compared to its own historical P/E ratio, and also slightly lower than that of CVS Health. Unlike Walgreens, CVS Health’s near term performance will be impacted due to its insurance business. CVS Health is waiving cost-sharing for certain Aetna members, who are hospitalized for COVID-19 treatment.

Our price estimate of $62 for Walgreens reflects an upside of over 35% from the current levels.

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