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The COVID Vaccine Rollout Will Be a Boon for These 2 Beaten-Down Stocks

By Jason Hawthorne - Dec 3, 2020 at 7:05AM

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The nation's two largest drugstore operators are about to get a much-needed shot in the arm -- while giving out millions of them for free.

This fall, U.S. officials publicly sketched out the details of a plan to provide Americans with free COVID-19 vaccinations. The Operation Warp Speed team said at the time that government agencies were preparing to begin shipping such vaccines within 24 hours of the FDA issuing an emergency use authorization for them. A recent deal between the Department of Health and Human Services (HHS) and major pharmacy chains should go a long way toward achieving that goal.

Under the plan, people will be able to get inoculated against the coronavirus at pharmacies such as CVS ( CVS 0.18% ), Walgreens ( WBA 0.56% ), Rite Aid, as well as other retailers with pharmacy operations such as Costco, Kroger, and Walmart.

Three out of every five drug stores across the U.S. will be part of the network providing the vaccines, which could be widely available to the general public by April. This is likely to drive a wave of foot traffic into those pharmacies, which could translate into a notable boost to revenue. And for CVS and Walgreens, that might infuse some energy into stock prices that have generally been falling for half a decade.

A smiling pharmacist in rows of shelving containing prescriptions.

Image source: Getty Images

The market's mood has changed

Since July 2015, CVS and Walgreens share prices are down by 40% and 60%, respectively. Their declines were largely driven by investors' expectations. The price-to-free-cash-flow ratios of both companies have dropped by about 60% over that span. That's a clear indication that investors generally think that for these businesses, significant growth is a thing of the past.

While both companies have tried to adapt to the changing healthcare environment -- CVS by buying Aetna in 2018, and Walgreens by using its scale to try and squeeze cash from partnerships and operations -- the market has lost confidence in their brick-and-mortar business model. The pandemic took a heavy toll on their foot traffic for much of 2020, but the rollout of COVID-19 vaccines could reverse that trend.

CVS Price to Free Cash Flow Chart

CVS Price to Free Cash Flow data by YCharts

Beyond the broader vaccine-distribution deal, the U.S. government has contracted with Walgreens and CVS to manage the vaccinations of at-risk populations and staff members at long-term-care facilities such as nursing homes and assisted-living facilities. The companies will receive supplies to administer the vaccines, but will have to coordinate inventory, scheduling, and administration.

Scaling up for the vaccine

In order to meet their share of the demand for COVID-19 vaccinations, CVS has been busy recruiting additional staff. And both Walgreens and CVS lobbied for the government to relax "scope of practice" regulations about who can administer the vaccine. In response, HHS in October issued guidance that will allow for pharmacists, pharmacy technicians, and authorized interns to do so. Typical drug stores have twice as many technicians as licensed pharmacists on staff, so this change will significantly increase their capacity to get people vaccinated.

Although Walgreens has yet to comment on its plans, CVS announced it would be hiring 15,000 additional workers in preparation for vaccine administration. More than two-thirds of those are expected to be pharmacy technicians. Currently, the company has 60,000 pharmacy techs and 34,000 pharmacists at its 9,900 retail locations. And the company has expanded its cold storage capacity, recognizing that the vaccines closest to regulatory approval must be kept at temperatures well below freezing.

In addition to the COVID-19 vaccine, CVS says it expects to deliver 18 million flu shots this year, up from 11 million in 2019. Walgreens is no doubt expecting a similar wave of vaccine-seekers.

Investing is about the future

CVS and Walgreens shares both are trading at near decade-low valuations. Although the pandemic has caused a drop-off in foot traffic, vaccine roll-outs are about to send tens of millions of Americans back into their conveniently located stores. CVS has signaled it will expand multiple facets of its business to take advantage of the opportunity. Walgreens is undoubtedly doing the same.

With the overall stock market trading at earnings multiples similar to those seen at the peak of the dotcom bubble, I'm inclined to give the benefit of the doubt to a couple of companies that are cheap relative to their past valuations, pay handsome dividends -- at their current share prices, CVS yields 3% and Walgreens yields 4.8% -- and are poised to serve as focal points for a national effort to vaccinate Americans against the worst pandemic in a century.

Investors have soured on many brick-and-mortar retailers over the last decade for good reason, but I think these drug stores are in a better position than most to recover. I also believe their stocks will soon begin to reflect optimism about the companies that hasn't existed for years, as people eagerly flock to their stores for vaccines that offer them the chance to safely get back to something like their pre-pandemic normal lives.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

CVS Health Corporation Stock Quote
CVS Health Corporation
$93.10 (0.18%) $0.17
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$136.60 (-1.01%) $-1.39
Walgreens Boots Alliance, Inc. Stock Quote
Walgreens Boots Alliance, Inc.
$48.50 (0.56%) $0.27
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
$530.11 (-2.20%) $-11.91
The Kroger Co. Stock Quote
The Kroger Co.
$42.81 (-5.01%) $-2.26
Rite Aid Corporation Stock Quote
Rite Aid Corporation
$12.59 (-0.47%) $0.06

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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