Walgreen and CVS Are Looking Healthy

Although it is not known as a huge growth industry, drugstore chains seem to be holding up just fine in a tough economic environment. Is now the time to invest in them?

May 12, 2014 at 6:05PM

While earnings season has been a bit of a mixed bag for retailers, with several companies blaming their lackluster sales for the period on the extreme winter weather, some industries have been holding up just fine. For instance, big pharmacy chains have been delivering solid results recently; and with a steadily aging population increasingly dependent on drugs and medical care as well as an increased number of Americans now covered under the Affordable Care Act, this trend looks set to continue. Let's take a look at recent results from major drugstore chains Walgreen (NASDAQ:WBA) and CVS Caremark (NYSE:CVS).

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Source: WikiMedia Commons

The biggest is still growing
Walgreen is America's largest drugstore chain, boasting more than 8,650 retail locations. Over the last few months, the company has been reporting some encouraging sales figures. In March, it saw overall sales growth of 4.5%, with pharmacy sales soaring nearly 9%. Moreover, comp-store sales were up a comfortable 3.5%.

The company's second-quarter earnings were less than inspiring, with earnings per share down by around 5% year over year. But the stock was still up more than 4% following the report, largely due to strong revenue growth. Sales for the quarter were up 5.1% on a 4.3% comp-store sales increase. According to management, the bottom line was pressured by a mild flu season and an aggressive discounting environment over the holiday period.

In any case, the latest read was very positive. April sales jumped 8.8% to nearly $6 billion, with customers spending around 6% more per visit. Pharmacy sales, which accounted for some 64.5% of total revenue, rose by 9.2%. The outlook for the current quarter is fairly rosy, with EPS expected to climb by around 9% and revenue by 5%.

CVS Caremark focuses on healthy living
CVS Caremark has been reporting some decent results of its own lately. While EPS missed the analyst consensus by $0.02, quarterly profits rose a very impressive 18% year over year for the fifth consecutive quarter of double-digit earnings growth. Revenue of approximately $32.7 billion was up 6.3% and came in stronger than the $32.3 billion consensus. According to management, the company does not usually blame the weather but made an exception this time as the effects were impossible to ignore.

Pharmacy sales were the driver behind these results, up more than 10% for the period. The chain, like its competitors, is also getting a boost from higher drug prices in general and is benefiting particularly from growth in its generic-drug segment. Generics generally have higher margins than branded medication, which is helping the bottom line.

Following a general trend in the industry, the company is working on becoming more of a health-care provider, adding in-store clinics and increasing collaboration with physicians and hospitals. CVS also drew a great deal of admiration for its decision to stop selling cigarettes, which is certainly more in keep with promoting a healthy lifestyle.

Valuations and metrics
One area of concern going forward is industry valuations. While CVS Caremark is trading at a more or less reasonable 19 times trailing earnings, Walgreen is starting to look pricey at 24.6. However, in terms of price to sales, both still look inexpensive at about 0.7 and 0.9, respectively. Both chains appear to have solid balance sheets, and both have comparable growth figures and margins. However, looking at valuations, CVS Caremark seems like the better deal.

The bottom line
Overall, the drugstore industry looks like it's in good shape. Moreover, demographics are working in their favor, as is the Affordable Care act. Walgreen and CVS Caremark, the two biggest drugstore chains in America, are both doing a good job of growing the top and bottom lines. However, CVS Caremark looks like the more compelling choice at the moment due to its lower valuation and double-digit earnings growth.

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Daniel James has no position in any stocks mentioned. 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.

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