After A 40% Fall Is Walgreens Stock A Better Pick Over CVS Health?

Given its better valuation, we believe Walgreens stock (NYSE: WBA) is a better pick than its peer CVS Health stock (NYSE: CVS). WBA stock trades at 0.1x revenues, versus 0.2x for CVS, given the latter’s superior revenue growth, profitability, and financial position. In the sections below, we discuss why we think WBA is a better pick than CVS. We compare a slew of factors, such as historical revenue growth, returns, and valuation.

1. CVS Stock Has Fared Better Than Walgreens, But Both Have Underperformed The Broader Markets

WBA stock has suffered a sharp decline of 60% from levels of $40 in early January 2021 to around $15 now, while CVS stock has seen a decline of 15% from $70 to $60 over the same period. This compares with an increase of about 40% for the S&P 500 over this roughly three-year period.

However, the decrease in WBA and CVS stock has been far from consistent. Returns for WBA stock were 31% in 2021, -28% in 2022, and -30% in 2023, while CVS stock saw a rise of 51% in 2021, a decline of 10% in 2022, and it fell 15% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that WBA underperformed the S&P in 2022 and 2023 and CVS underperformed the S&P in 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Health Care sector including LLY, UNH, and JNJ, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could CVS and WBA face a similar situation as they did in 2023 and underperform the S&P over the next 12 months — or will they see a recovery? While we think both stocks will see higher levels over the next three years, WBA will likely outperform CVS.

2. CVS’ Revenue Growth Is Better

CVS has fared better, with its revenue rising at an average annual rate of 10% from $268.8 billion in 2020 to $357.8 billion in 2023, while Walgreens has seen its sales rise at a 4.5% average annual rate from $122 billion to $139.1 billion over the same period.

Walgreens benefited from increased COVID-19 vaccine and testing demand in 2021 and 2022. In fiscal 2023, Walgreens sales were bolstered by the acquisitions of VillageMD, Shields, and CareCentrix. Increased prescription volume and drug price inflation also aided the sales growth for Walgreens.

Similar to Walgreens, CVS’ revenue growth since the beginning of the pandemic was driven by increased demand for COVID-19 testing and vaccine administration. However, this trend has now reversed, given the lower demand for Covid-19 vaccination. The company’s healthcare benefits segment has seen a large 40% rise in revenue between 2020 and 2023, led by a rise in total medical membership, which currently stands at 26.8 million, compared to 23.4 million in 2020. This trend is expected to continue over the coming years, given the aging U.S. population.

Our Walgreens Revenue Comparison and CVS Health Revenue Comparison dashboards provide more insight into the companies’ sales. We expect both Walgreens’ and CVS’ revenue to grow at a mid-single-digit average annual rate in the next three years.

3. CVS Is More Profitable

Walgreens’ operating margin has declined from 0.8% in 2020 to -5.1% in 2023, while CVS’ operating margin declined from 5.2% to 4.3% over this period. Also, looking at the last twelve months period, CVS’ operating margin of 3.6% fares better than -1.4% for Walgreens. The decline in operating margin for Walgreens can partly be attributed to a $5.5 billion after-tax charge for opioid-related claims and litigation in fiscal 2023.

Healthcare insurance companies, including CVS, are seeing a rise in medical costs with an increase in overall elective procedures. This has impacted their margins in the recent past. For perspective, CVS saw its medical benefits ratio surge by 240 bps y-o-y to 86.2% in 2023. Furthermore, earlier this year, the U.S. Centers for Medicare & Medicaid Services stated that Medicare Advantage payments would rise by an average of 3.7% in 2025, falling short of the street expectations.

Looking at financial risk, CVS fares better. Walgreens’ 244% debt as a percentage of equity (with total debt of $33 billion and a market capitalization of $14 billion) is much higher than 105% for CVS. Also, CVS’ 5.2% cash as a percentage of assets is higher than 1% for Walgreens, implying that CVS has a better debt position and more cash cushion.

4. The Net of It All

We see that CVS has demonstrated better revenue growth, is more profitable, and has a better financial position. However, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Walgreens is the better choice of the two. If we compare the current valuation multiples to the historical averages, Walgreens fares better, with its stock currently trading at 0.1x revenues vs. the last five-year average of 0.3x. In contrast, CVS’ stock trades at 0.2x revenues, versus 0.4x average over the last five-years.

Both companies have some positives to look forward to, while they also have some headwinds. While Walgreens may be in talks with potential buyers for its UK-based Boots business, that may bode well for its stock, the weak consumer demand environment and declining margins remain a near-term concern.

While higher medical costs remains a near-term concern for CVS, it will likely continue to benefit from the steady growth of its healthcare and pharmacy services businesses. The increased prescription volume and drug price inflation will likely drive the top-line expansion in the next three years. The company will also benefit from its last year’s acquisitions of Signify Health and Oak Street Health.

Overall, given its attractive valuation, we think WBA is a better pick over CVS for the next three years.

While WBA may outperform CVS in the next three years, it is helpful to see how Walgreens’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 6/4/2024
[2] Cumulative total returns since the end of 2016

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