With the dollar, healthcare costs and consumer sentiment all on the rise, there is an industry that is the crux of these three powerful trends. I’m talking about pharmacies and drugstores. The U.S. drugstore business brings in over $250 billion annually, and it’s growing at a solid 2.2% clip each year. That’s a lot of antacid and ibuprofen. So today let’s look at three of the nation’s top drugstore chains and see which one I’ll write a prescription for.
CVS Health Corp. (CVS) may be the second-largest drugstore chain in the U.S. for now, but that may not last for much longer. Earlier this year CVS Health Corp.. announced that it will stop selling tobacco products, in an effort to not only have an edge over competitors but also to better brand itself as a health-care provider. CVS’s business plan seems to working out, as the company is by far the strongest performing pharmacy company. Let’s take a close look at why CVS stands out from the pack.
CVS Health Corp has had a solid year. In the third quarter, CVS’s net revenue jumped by 10% year-on-year to $35.02 billion, topping analysts’ expectations of $34.75 billion in revenues. Breaking it down, retail pharmacy revenues increased by 3.1% to $16.75 billion, while pharmacy services rose 15.7% to $22.5. Looking ahead to the fourth quarter, analysts’ estimate that CVS’s EPS will be $1.20, while growth is estimated to be 7.10%. The average revenue estimate for the fourth quarter is $35.15 billion. CVS also knows how to treat its shareholders. It has a decent dividend yield of 1.21% and an annual payout of $1.10. The company is also in the process of a $6 billion share repurchase program, which is always a good sign of a strong stock. CVS is an A-rated Strong Buy.
CVS Health Corp.’s top competitors are Walgreens Co. (WAG) and Rite Aid Corporation (RAD); while the companies fall in the same range when it comes to forward P/E ratios (one of my favorite valuation metrics), they lack in other key fundamental metrics that CVS excels in.
Take Walgreens Co. The company has had a shaky year, just meeting or missing analysts’ estimates for three quarters. While the company has decent buying pressure and $3 billion share repurchase program, Walgreens only increased its stock repurchase program after being pressured by shareholders. The company’s credit rating was also downgraded a few months back by Moody’s Investors Service. Looking ahead, the company’s EPS estimate for the first quarter is $0.93, translating to 16.75% annual earnings growth. The average revenue estimate for the quarter is $20.60 billion. Walgreen does provide investors with a dividend yield of 1.98% or $1.35 annual payout. WAG is a B-rated (cautious) Buy, because even a slight drop in buying pressure could send it back down to a hold.
Rite Aid Corporation is probably the weakest out of the three in terms of buy pressure, and to add insult to injury it doesn’t have any stock buyback program to speak of. Rite Aid also does not pay any sort of dividend to its investors. The company does have decent fundamentals, meeting or exceeding analysts’ estimates with earnings, but that’s not enough to consider this stock a good buy. Rite Aid was recently downgraded from a B-rated buy to a C-rated hold in Portfolio Grader. For the fourth quarter, analysts estimate an EPS of $0.05 and an average revenue estimate of $6.61 billion. That puts the earnings growth estimate for the fourth quarter at 16.70%. RAD is a C-rated Hold.
As you can see, CVS is the strongest stock, with excellent buying pressure and a much more consistent track record than its competitors.