Is Walgreens Stock A Better Pick Over Its Peer?

We think that CVS Health stock (NYSE: CVS) currently is a better pick compared to Walgreens Boots Alliance stock (NYSE: WBA), despite CVS being more expensive of the two with its P/S ratio of 0.5x compared to 0.3x for Walgreens. Even if we were to look at the P/EBIT ratio, CVS is more expensive trading at 20.4x vs. 8.5x for Walgreens. Although both the companies saw a rise in revenue over the last twelve months, with Covid-19 testing as well as vaccine administration, the growth has been slightly better for Walgreens.

If we look at stock returns, CVS’ 50% growth is far better than WBA’s -1% return over the last year. While both the companies are likely to face a slowdown in sales growth post-pandemic, given lower contribution from Covid-19 testing and vaccine administration, CVS’ stock price has been bolstered by its plans to raise dividends and share repurchases. However, there is more to the comparison, and we believe that CVS will offer better returns over the next three years, as discussed in the sections below. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis Walgreens vs CVS Health: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. CVS Health’s Revenue Growth Has Been Stronger

• Both companies managed to see sales growth over the recent quarters, but Walgreens has witnessed a comparatively faster revenue growth. Looking at a longer time frame, CVS’ sales have jumped from $185 billion in 2017 to $285 billion over the last twelve months, while Walgreens revenues have risen from $118 billion to $135 billion over the same period.
• For both the companies, the revenue growth was partly driven by increased demand for Covid-19 testing as well as vaccine administration. Our Walgreens Revenue and CVS Health Revenue dashboards provide more insight on the companies’ sales.
• Now, Walgreens’ revenue growth of 9% over the last twelve month period is slightly better than 7% growth for CVS Health, given an increased contribution from its international business.
• However, if we were to look at a slightly longer time frame, CVS has outperformed Walgreens with its last three-year revenue CAGR of 14%, compared to 0.5% for Walgreens.
• Note that CVS revenue growth was also aided by its Aetna acquisition toward the end of 2018.
• Looking forward, both the companies will likely see a decline in contribution from vaccine administration.
• CVS’ revenue is expected to grow at a faster pace compared to Walgreens over the next three years. The table below summarizes our revenue expectation for the two companies over the next three years, and points to a CAGR of 11% for CVS, compared to just 2% CAGR for Walgreens, based on Trefis Machine Learning analysis.
• Note that we have different methodologies for companies negatively impacted by Covid, and for companies not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively impacted by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate, and beyond the recovery point, we apply average annual growth observed in the three years prior to Covid to simulate return to normal conditions. For companies registering positive revenue growth during Covid, we consider average annual growth prior to Covid with certain weight to growth during Covid and the last twelve months.

2. Walgreens Is More Profitable At No Extra Risk

• Walgreens’ operating margin of 3.7% over the last twelve month period is slightly better than 2.5% for CVS.
• Furthermore, if we were to look at the recent margin growth, Walgreens has fared better than CVS, with last twelve month vs last three year margin change at 1% for Walgreens, compared to -2.5% change for CVS.
• Both the companies saw similar operating margins over the past few years. While Walgreens’ operating margin declined from 4.0% in 2019 to 1.8% currently, CVS’ operating margin declined from levels of 4.6% to 4.0% over the same period. Our Walgreens Operating Income and CVS Health Operating Income dashboards have more details.
• Looking at financial risk, both are comparable. Walgreens’ 32% debt as percentage of equity is lower than 40% for CVS, while its 4% cash as percentage of assets is lower than 6% for the latter, implying that Walgreens has better debt position, and CVS has a better cash position.

3. The Net of It All

• We see that CVS has demonstrated better revenue growth over Walgreens over the last three years. It does not have any extra financial risk compared to Walgreens. However, the latter is more profitable, and it is available at a relatively lower valuation.
• Now, looking at future prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe CVS is currently the better choice of the two.
• The table below summarizes our revenue and return expectation for Walgreens and CVS over the next three years, and points to an expected return of 18% for CVS over this period vs. just 5% expected return for WBA stock, implying that investors are better off buying CVS over WBA, based on Trefis Machine Learning analysis – Walgreens vs CVS Health – which also provides more details on how we arrive at these numbers.

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[1] Month-to-date and year-to-date as of 2/9/2022
[2] Cumulative total returns since the end of 2016

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