Rite Aid, Walgreen, and CVS: Growth Becomes the New Driver

As most of the market’s big momentum movers are trading lower, Walgreen, CVS, and Rite Aid keep giving reasons to buy.

Apr 6, 2014 at 9:00AM

CVS Caremark (NYSE:CVS) and Walgreen (NASDAQ:WBA) have both been strong market performers over the last couple years, and their smaller peer Rite Aid (NYSE:RAD). has been among the top performers of the S&P 500 since late 2012. This industrywide performance is not without reason, and in looking ahead to 2014, it now appears another catalyst has emerged, which could take these stocks even higher. 

2013: The year of margin expansion
Since the end of 2012, CVS, Walgreen, and Rite Aid have significantly outperformed the S&P 500 index. Yet, despite this top market performance, none of the noted stocks trade at a lavish multiple.

Company

Stock Performance Since December 2012

P/E Ratio

CVS

60.3%

20

Walgreen

85.5%

23.6

Rite Aid

525%

22

S&P 500

33%

 

The reason that CVS, Walgreen, and Rite Aid have been able to return such large stock gains while keeping their P/E multiples in check is because of significant margin expansion. It is this margin improvement that really helped shares to catapult higher in 2013.

Company

Operating Margin 2012

Operating Margin Last 12 Months

CVS

5.5%

6.3%

Walgreen

4.8%

5.1%

Rite Aid

(1.4%)

3.7%

While each company made operational improvements and modifications to their existing business, the cause for margin expansion was more related to a macro shift from brand name to generic drugs. Essentially, brand drugs have large markups from the manufacturer and leave little profits for pharmacies.

However, between 2011 and 2016, $133 billion in brand drug sales have or are losing patent protection, which then introduces cheaper generic drugs. These generics allow for larger returns to pharmacies because of both pricing and the ability to buy in bulk, which lowers costs.

For Rite Aid in particular, this rise in margin took the company from near bankruptcy to now thriving, and its stock is a reflection of this performance. In a recent article, I used quotes from these companies' CEOs to show how generics have affected each business and also the exceptional year(s) that could be ahead with major brand drugs losing patent protection. Hence, margins should continue to go higher.

2014: Even more margin expansion (and growth)
2014 is already looking like a mirror of last year, as CVS, Walgreen, and Rite Aid have all significantly outperformed the S&P 500 index.

Company

2014 Stock Performance

CVS

5%

Walgreen

17%

Rite Aid

30%

S&P 500

2%

Now, what's really exciting about 2014 is that aside from expectations of continued margin growth, all of the noted companies are also experiencing revenue growth. For Rite Aid in particular, revenue has fallen in each of the last two years.

However, in the first three months of this year, Rite Aid's same-store sales have increased 2.9%, 1.5%, and 0.7%, respectively. While the 0.7% rise in March shows that Rite Aid's growth has slowed, it's important to note that Easter was in March last year. But, more importantly, Rite Aid's pharmacy business saw sales rise 4.2%, 3.1%, and 3.5%, respectively, in the first three months of this year. Collectively, this shows that Rite Aid is now growing.

In comparison, Walgreen, which does have a recent history of growth, saw its same-store sales rise 3.7% in January and then 4.5% in the last two months. Like Rite Aid, Walgreen's pharmacy business has been a key catalyst, growing nearly 9% in March. This unexpected growth has served as a springboard for the stock trading higher.  

Lastly is CVS, which hasn't yet reported March sales but did see overall revenue increase 4.2% in its recent quarterly report, including pharmacy growth of 5.2%. Overall, this complements the performance of its peers and is a good reason to believe that each stock could continue to trade higher this year.

Final thoughts
CVS and Walgreen are large, well-established leaders in this space whose fundamental performance is a great indication of the overall health of the industry. And while neither company is particularly expensive, Rite Aid is a recovery story, and in that recovery might be significantly more upside potential.

Rite Aid still has the most to gain in margins and is already substantially cheaper than its peers relative to sales. For example, CVS and Walgreen trade at 0.7 and 0.8 times sales, respectively, yet Rite Aid trades at only 0.2 times sales. This discount allows for more upside; and as margins improve and growth occurs, it should continue to outperform its peers.

6 stock picks poised for incredible growth
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Brian Nichols owns shares of Rite Aid. The Motley Fool recommends CVS Caremark. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers