With Big Revenue Gains in the Past, Should You Still Own Pharmacies?

Walgreen reported May sales and reached new highs on Wednesday, and as other pharmacies follow it higher, investors must ask if these stocks still present an investment opportunity.

Jun 9, 2014 at 9:00AM

Shares of Rite Aid (NYSE:RAD) and CVS Caremark (NYSE:CVS) followed Walgreen (NASDAQ:WBA) higher after it reported strong monthly sales. Rite Aid and Walgreen in particular have led the industry to being one of the top performers of the last two years, but in looking at current growth trends, will the industry keep outperforming the overall market? 

What has driven stock gains?
Year to date, Rite Aid and Walgreen have posted stock gains of 65% and 29%, respectively, significantly outperforming the S&P 500 index's 5% gain. These gains further add to a year in 2013 when Rite Aid soared 265% and Walgreen added another 57%.

Last year, much of the gains were created from a continuation of the patent cliff, a period of five years where $130 billion in brand-drug sales lose patent protection, as generic drugs create higher margins. For Rite Aid, the introduction of new generics took it from the brink of bankruptcy to creating $249 million in net income last year and being able to restructure its stores with new technology.

As for Walgreen, it certainly benefits from new generic introductions, but much of its stock gains have been in connection to its investment in Alliance Boots and the assumption that it will acquire the remaining 55% stake in early 2015. As a result, Walgreen will likely move its operations to Europe, pushing its corporate tax rate from 35% to 21% and driving profits much higher.

The current driver of gains
With all things considered, 2013 was about profits and becoming more efficient by a number of means. Yet, in 2014 we are seeing substantial growth for these companies, and this despite a higher mix of lower-priced generic drugs.

For reference, you can see below how Rite Aid's and Walgreen's year-over-year monthly sales growth has played out.

2014 Year-Over-Year Monthly Sales Growth


Rite Aid 

















Clearly, Walgreen is growing significantly faster than Rite Aid, but it is also more expensive as an investment. Walgreen currently trades at 0.9 times sales versus 0.3 for Rite Aid, showing a large disconnect, in large part due to the differential in growth.

Nonetheless, both have shown significant improvements. For Rite Aid, it grew revenue just 0.5% last year, which conveniently includes January and February's strong performance. Albeit, Rite Aid's 2.48% average monthly growth in 2014 is far better than last year, and it's because of this growth that Rite Aid recently boosted full-year revenue guidance by nearly $1 billion above the consensus.

As for Walgreen, its 5.2% average monthly growth in 2014 puts the company on par to exceed analyst expectations for 5% revenue growth this year. This shows major improvements over a year in 2013 when Walgreen's revenue grew just 0.8%. Thus, it was the company's 16.3% increase in adjusted net earnings that pushed the stock higher in 2013, not growth.

CVS isn't performing bad either
In addition, Walgreen and Rite Aid aren't alone in producing strong sales figures in 2014. CVS has also performed well; the company reported earnings in May to show a 6.3% increase in revenue over last year. Like Rite Aid and Walgreen, CVS struggles with its retail division but has seen pharmacy carry the load, with a revenue increase of 10.3% in its first quarter.

With that said, the driving force of growth is pretty much universal throughout the space, and it includes poor consumer traffic but higher basket sizes and strong pharmacy sales/volume.

Final thoughts
Albeit, CVS has the fewest catalysts moving forward, and at 15.5 times next year's earnings, it's likely fairly valued. Yet, Rite Aid at 0.3 times sales still trades far below the levels of its peers, and with a profit margin of 1%, it still has room to become much more efficient. And speaking of efficiency, the Alliance Boots acquisition could drive hundreds of millions in additional annual profits for Walgreen.

With that said, it's never a bad idea to take profits, but as we look ahead, Walgreen and Rite Aid in particular are showing no current signs of slowing down.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information