The good stuff
The $30.7 billion in revenues in Q2 set a new sales record for the $56.7 billion pharmacy health-care provider. And the 16.35% jump in revenues over last year drove a 25% increase in non-GAAP earnings. It's no wonder CEO Larry Merlo was "very pleased with our strong operating performance."
Same-store sales improved 5.6%, and CVS opened another 36 retail pharmacy outlets -- and closed eight -- during the quarter. Net cash from operations also jumped year to date, to $4 billion versus $3 billion last year. Both the pharmacy services and retail pharmacy units showed marked improvement, and management had every right to feel giddy. Capping off the good news for CVS is the new and improved revenue and earnings guidance for the balance of the year.
Four reasons for the muted reaction
A full quarter of revenue from April 2011's acquisition of Universal American's Medicare business raises the question of whether this is a true apples-to-apples comparison. CVS didn't state exactly how much UAM added to the recent quarter, but it was mentioned prominently in the earnings release. With UAM's $1.25 billion price tag, and an immediate doubling of CVS' existing Medicare business, this year's impact had to be significant.
CVS shareholders have enjoyed an 8% increase in share price year to date. Walgreen, until last month's meteoric rise, was down over 10% year to date. Rite Aid
Now that Walgreen and Express Scripts have made up, another problem for CVS is the opportunity Walgreen offers investors. In addition to more stock price appreciation potential, Walgreen's 3.1% dividend yield is more than twice the 1.4% dividend yield CVS offers its shareholders.
In addition to the attractive dividend yield, Walgreen beats out CVS in several key financial areas. The impact of the new Walgreen and Express Scripts pact won't be felt until the third quarter.
Let's use the average of the recently provided upward earnings guidance CVS provided of $3.35 a share. At current share price levels, CVS is trading at just over 13.1 times projected earnings for 2012. Walgreen is trading at just over 12 times trailing earnings. Assuming Walgreen gets a year-end boost from the Express Scripts deal, the disparity is going to get bigger. Gross margins, return-on-assets, and return-on-equity numbers all favor Walgreen, too. And by a wide margin.
Bottom line is, CVS didn't do anything wrong; in fact, just the opposite. But questions regarding keeping its new customers and an apples-to-oranges comparison considering the UAM acquisition keep it from being my pick. For value and income in the retail pharmacy sector, to me Walgreen is the clear choice.
There are a number of retail investment options, of course, in and out of the pharmacy sector. Many offer serious appreciation potential, but which are the best of the best? For a few ideas, take a look at our special free report "The Motley Fool's Top Stock For 2012."