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CVS and Walgreens Show Why Investment Objectives Matter

CVS and Walgreens Show Why Investment Objectives Matter
  • Before the pandemic, many pharmacy chains were adapting to a wellness model
  • Both CVS and Walgreens are making significant in-roads into this space
  • What is current, and future, outlook for both stocks
At first glance, CVS Health NYSE: CVS) looks clearly superior to Walgreens Boots Alliance (NYSE: WBA). In fact, in the last 12 months, and even over the last five years, these are two stocks on different trajectories.  

But this is a time when understanding your “why” for owning a stock is so critical. This article will analyze the current, and future, outlook for both stocks and explain why each has a case to make for different investors.  

The Pharmaceutical Space is Changing  

Even before the pandemic, many pharmacy chains were adapting to a wellness model. The idea is to become a destination for customers to manage their overall health care instead of simply being a place they go to pick up a prescription. By taking on the role of a neighborhood clinic, pharmacy chains are adding more value for their patients.  

And both CVS and Walgreens are making significant in-roads into this space. CVS Health hosts over 1,100 MinuteClinic locations which are just one of the services provided by the company’s HealthHUB initiatives. 

For its part, Walgreens offers its Village MD and Walgreens Health initiatives. As of the company's most recent earnings report, the company has seeded the former in 22 markets and plans to have approximately 200 clinics open by the end of 2022. And the company is planning to have approximately 100 Walgreens Health Corners open by the end of the year.  

And both companies are active in virtual care with the ability of patients to access services through mobile apps and telehealth services. The Covid-19 pandemic made virtual care essential, but it also served as a proof of concept that, for some patients, may be a choice for managing chronic conditions. 

Will an Acquisition Have a “Significant” Impact on CVS Stock? 

CVS stock has been outperforming the market in the last year. And the stock is getting a lift from a Wall Street Journal report that it has made a bid to buy Signify Health. The acquisition makes sense if CVS intends to branch into the home-health sector. Signify Health uses technological solutions to aid in-home care. And, as the Journal reported, the company “offers in-home health evaluations for Medicare Advantage and other government-run managed care plans.”  

As of this writing, it’s unclear whether the acquisition will go through. However, if it does, it could signal the next leg up for a stock that’s climbed 26% in the past 12 months and is essentially flat for the year. The company is projected to post single-digit growth in both revenue and earnings over the next five years without the Signify Health acquisition. Analysts are also moderately bullish on the stock giving it a 12% upside. 

With that said, the company has been on a buying spree lately having bought Omnicare and Aetna for a total cost of over $40 billion dollars. While it does appear that the company’s free cash flow (FCF) should be more than enough to cover the purchase, short-term investors may be in for some volatility.  

Walgreens Boots Alliance is an Undervalued Dividend Stock 

In contrast to CVS Health, Walgreens has seen its share price fall over 50% in the last five years. And WBA stock is down 16% in just the last 12 months. Making matters worse, the short interest on the stock is 3x higher than that of CVS stock. There is clearly bearish sentiment on Walgreens.  

But there are bright spots if you are looking for under-the-radar value stocks. For starters, Walgreens pays a sustainable, growing dividend. In fact, the company has increased its dividend in each of the last 47 years.  

And, by any objective measure, WBA stock is undervalued. The stock is trading at just over 7x earnings and the company scores above the sector average in key areas such as profit margin, return on equity, and return on assets. Analysts tracked by MarketBeat give the stock a $46.25 price target which gives the stock a 17% upside. 

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