Are you looking for value in today's market? If so then CVS Health (CVS -1.62%) and Kroger (KR -2.28%) should be on your watchlist. Both companies have developed winning business models and offer up solid growth prospects, yet both companies trade at a discount to the S&P 500.
So which of these two industry giants is the better buy today? Let's look at the bull case for owning each to see if we can find an answer.
The case for CVS Health
Investors get two businesses in one when they buy CVS Health. The company is America's second-largest retail pharmacy chain and second-largest pharmacy benefit manager, or PBM.
In the PBM business, CVS acts as a middleman between drugmakers and employers, governments, unions, and other prescription drug buyers. CVS uses its scale to negotiate hefty discounts on drugs and then passes along the savings to its members. With a 97% customer retention rate, it is clear that this business creates a lot of value for its customers.
On the retail side, CVS operates more than 9,600 retail pharmacies in the U.S., Puerto Rico, and Brazil. Beyond offering basic pharmacy services, these stores also sell convenience items and in many cases offer basic healthcare services through the company's MinuteClinic network. With the number of citizens aged 65 and over expected to nearly double over the next few decades, both of these businesses have a great tailwind behind them that should drive long-term profit growth.
Image source: CVS Health.
Despite these positives, CVS Health's stock has been cast aside of late. Last year investors learned that the company's archnemesis, Walgreen Boots Alliance (WBA -0.93%), managed to lure away two big customers. The loss is expected to steal roughly 40 million prescriptions this year alone, which is having an impact on the company's growth prospects. More recently investors learned that Amazon (AMZN 1.30%) is taking a hard look at the pharmacy business, which, if true, could put this company's profits under more pressure in the future.
Thankfully, management still believes that the company is capable of putting up earnings-per-share growth in excess of 10% per year over the long term in spite of these headwinds. That's an attractive growth rate for a company that is only trading for 12 times next year's profit estimates and pays out a strong dividend that is currently yielding 2.6%
The case for Kroger
While the supermarket industry is recession-proof, it is so mature and brutally competitive that most grocery stores are hardly growing at all. However, industry giant Kroger isn't your average grocer. This company has gobbled up a number of winning regional chains over the years, which has kept its top line in growth mode. If you've ever shopped at a Roundy's, Harris Teeter, Fred Meyer, Ralphs, Murray's Cheese, or King Soopers, then you are actually a Kroger customer even if you didn't know it.
Beyond acquisitions, Kroger's has also rolled out a number of growth initiatives in an effort to keep its profits flowing. These include adding fuel stations, making a big push into organics, adding self-checkout kiosks, and investing in its digital capabilities to more effectively target new shoppers. When combined, these efforts have resulted in 12 consecutive years of market-share gains and flourishing financial statements. With Kroger's headline numbers heading in the right direction, management has been able to use its excess profits to reward investors.
KR Dividend data by YCharts.
Looking ahead, management believes that it can keep delivering EPS growth in excess of 8% per year and raise its dividend annually by continuing to execute against its simple business plan. With shares trading for less than 13 times forward earnings and offering up a dividend yield of 1.6%, Kroger's stock could certainly be in value territory.
The better buy
While I firmly believe that investors will do well by investing in either one of these high-quality businesses right now, my gut tells me that Kroger is the better buy. The company's stock has outperformed both CVS Health and the S&P 500 over the past five years, which I like to see since I'm a believer that winners tend to keep on winning. In addition, we still can't fully quantify just how serious a threat Amazon could be to CVS Health's long-term future. Those two factors make Kroger my favorite choice for new money between these two terrific options.
