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Stock Wars: CVS Health Vs. Walgreens Boots Alliance

Benzinga’s weekly Stock Wars matches up two leaders in a major industry sector, with the goal of determining which company is the better investment.

Benzinga · 09/01/2021 18:39

Benzinga’s weekly Stock Wars matches up two leaders in a major industry sector, with the goal of determining which company is the better investment.

This week, the duel is between a pair of pharmacy retail chains: CVS Health Corp (NYSE:CVS) and Walgreens Boots Alliance Inc (NASDAQ:WBA).

The Case For CVS Health: This company can trace its roots to Consumer Value Store in Lowell, Massachusetts, founded in 1963 by the brothers Stanley and Sidney Goldstein and their business partner Ralph Hoagland. By the end of its first year in business, CVS expanded to 17 stores in New England that focused on health and beauty products.

The company didn’t get into the pharmacy business until 1967, and the founders sold their operation in 1969 to Melville Corporation, a publicly-traded company that owned several retail chains including the Thom McAn shoe stores and Kay-Bee Toys; Melville changed its name to CVS Corporation in 1996.

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CVS started the 1970s with 100 stores across the Northeast, and during the decade it began a strategy of expanding into other markets by acquiring regional pharmacy chains, starting with its purchase of Indiana’s Clinton Drug and Discount Stores.

Today, CVS has approximately 9,900 retail locations in all 50 states, the District of Columbia and Puerto Rico, and it has also has a presence in the health insurance industry via its $69 billion acquisition of Aetna in 2018

One of the biggest stories out of CVS Health this year involved the changes in its executive ranks: Karen Lynch, executive vice president at CVS Health and president of its Aetna health insurance subsidiary, took over in February as president and CEO from Larry Merlo, who retired after a decade at the helm of the Woonsocket, Rhode Island-based company.

This was followed by Aetna’s Chief Financial Officer Shawn Guertin and Chief Communications Officer Kathryn Metcalfe taking the equivalent roles in the CVS Health C-suite.

And while CVS Health’s role in providing testing and vaccinations for COVID-19 has been a dominant news story for its pharmacy business, the company has been quietly growing its retail store grocery offerings via the recent addition of more than 150 new products under its Live Better and Gold Emblem store brands. It also debuted Goodline Grooming Co., a men’s skin and grooming care brand exclusive to the chain.

In its most recent quarterly earnings data — the second-quarter report published Aug. 4 — CVS Health recorded total revenue of $72.6 billion, up from $65.3 billion one year earlier.

The company's $4.3 billion operating income was down from the previous year’s $4.6 billion and its $4.8 billion adjusted operating income was down from the previous year’s $5.3 billion. The company attributed the decline to a “return of more normalized utilization levels in the Health Care Benefits segment” compared to second quarter 2020’s pandemic-focused activities.

The company added that the decline was “partially offset by increased prescription and front store volume, COVID-19 vaccinations and diagnostic testing in the Retail/LTC segment as well as improved purchasing economics and increased pharmacy claims volume in the Pharmacy Services segment.”

The second quarter's diluted earnings per share (EPS) of $2.10 and adjusted EPS of $2.42 represented drops from the previous year’s $2.26 and $2.64, respectively. Still, the company raised its full-year 2021 GAAP diluted EPS guidance range to $6.35 to $6.45 from $6.24 to $6.36 and its full-year 2021 adjusted EPS guidance range to $7.70 to $7.80 from $7.56 to $7.68. It also raised its full-year 2021 cash flow from operations guidance range to $12.5 billion to $13 billion from $12 billion to $12.5 billion.

“We continue to play a critical role in helping America prevail against the pandemic while demonstrating the effectiveness of our unique business model, which is focused on meeting customer needs through innovations that make health care more local, affordable and connected,” said CEO Lynch.

CVS Health closed Wednesday at $85.71, closer to its 52-week high of $90.61 than to its 52-week low of $55.36.

See Also: The full Stock Wars series

The Case For Walgreens Boots Alliance: This Deerfield, Illinois-based holding company was formed in 2014, although its roots go much further back in time.

Walgreens was started by Charles R. Walgreen as a food store in Chicago in 1901, and by 1919 he expanded the chain to 20 Chicago-area stores. During the Prohibition era when alcohol sales were constitutionally mandated as illegal, doctors were able to write prescriptions for whiskey as an allegedly medicinal treatment and an extraordinary number of otherwise-healthy Chicagoans filled these unlikely prescriptions at Walgreens.

The company also pioneered another popular drink during this time: the malted milkshake, which opened Walgreens into the ice cream business.

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Not unlike CVS Health, Walgreens grew its business via acquisitions. This activity picked up considerably in the 2000s with notable pick-ups of the New York City-area Duane Reade pharmacy chain for $1 billion in 2010 and Drugstore.com and its Beauty.com subsidiary for $409 million in 2011.

In 2012, Walgreens paid $6.7 billion to purchase a 45% stake in Alliance Boots, the pharmacy retail chain that traced its heritage back to the Nottingham, England-based Boots herbal medicine shop in 1849. In 2014, Walgreens acquired the remaining 55% stake of Alliance Boots for $15.3 billion.

Among the most important news out of Walgreens Boots Alliance this year was the $6.5 billion sale in January of its European drug wholesaler business Alliance Healthcare to AmerisourceBergen Corp (NYSE:ABC). The company said the sale would enable it to focus on growing and transforming its core retail pharmacy and healthcare businesses. In March, Chief Operating Officer Rosalind (Roz) Brewer was named CEO. At the time of her appointment, Brewer was the sole Black woman to serve as chief executive of a Fortune 500 company — Thasunda Brown Duckett, CEO of TIAA has since become the second member of that rather tiny corporate sorority.

The company’s latest quarterly earnings data, the third quarter report published on July 1, recorded $34 billion in sales, up from $30 million one year earlier, with a gross profit of $7.1 billion versus $5.9 billion in the prior year. The company’s U.S. Walgreens segment had quarterly sales of $28.7 billion, up 5.1% from the year-ago quarter, while the international Boots segment had sales of $5.3 billion, up 75.8% year-over-year.

The third quarter's $1.1 billion operating income was up from the $1.6 billion loss in the same period in 2020. Both the basic and diluted EPS in the quarter was $1.38, an improvement from the previous year’s $1.95 loss in both categories. The company was somewhat more circumspect than CVS Health in its fiscal 2021 guidance, merely forecasting a rise from mid-to-high single-digit growth to around 10% growth without committing to specific price ranges.

“We are accelerating our investments to advance our operational excellence, including technology innovations that support mass personalization, pharmacy of the future and the next phase of growth in tech-enabled healthcare,” said Brewer, noting the company’s investments were fueled by its Alliance Healthcare divestiture.

Walgreens Boots Alliance closed Wednesday at $50.29, closer to its 52-week high of $57.05 than to its 52-week low of $33.36.

The Verdict: Both companies have responded to the challenges created by the pandemic, and both appear ready to handle the continuing crisis created by the delta variant of the coronavirus. And both companies are already at work on their post-pandemic identities.

In addition to the investments alluded to be, thanks to the sale of the Alliance Healthcare business, Walgreens Boots Alliance is also using those profits to retire $3.3 billion in debt, which will help strengthen its ability to move forward as it strengthens its retail and pharmacy business.

The company has already laid the foundation on that front, recently announcing a minimum wage boost to $15 per hour by mid-2022 and hiring former Walmart Inc (NYSE:WMT) executive Tracey Brown as president of retail products and chief customer officer, a new position.

Meanwhile, CVS Health’s Lynch defined her operations as a “broad health-solutions company” during an interview earlier this year, adding that the corporate focus is “moving toward being a much more consumer-centric health-services, health-solutions company meeting the needs of consumers where they want to be met.” This became evident in last month’s introduction of the Aetna Virtual Primary Care program for self-funded employers, and one can assume additional programs will be forthcoming.

But as Walgreens Boots Alliance moves further into a retail pharmacy and CVS Health aims at health services, which one is going in the right direction? Furthermore, aren’t both of these stocks a bit on the underperforming side, especially when one considers the dominance of their sector?

At this point, maybe a wait-and-see attitude is best for both stocks, with a return to the subject at the end of their respective earnings to see if their guidance predictions were on target.

Photos: Cover photo by Vnukko from Pixabay; store photos by Mike Mozart / Flickr Creative Commons.