A recent spat between the two largest drugstore chains in the nation has sent the shares of each company to the bargain bin. In the case of one, the stock has approached levels not seen for a decade even though sales and earnings have both grown in the low double digits during that timeframe.
That consistency spans a period containing two major recessions, brought on by the Internet and housing bubbles. But no matter the economic climate, individuals need to have prescriptions filled and even tend to buy cosmetics and other basic merchandise on their way to the checkout line from the pharmacy at the back of the store.
The two firms in question are Walgreen (WAG) and CVS Caremark (NYSE:CVS). Walgreen recently announced that it would steer new customers away from CVS' pharmacy benefit management (PBM) business, which processes and pays prescription drug claims among other things, and toward its competitors instead. CVS responded in kind by dropping all Walgreen customers. The two have since made up, but the damage had already been done to both firms' shares.
Both Walgreen and CVS are appealing investments at current share price levels, but CVS has a more uncertain outlook given a number of controversies in its PBM business from the acquisition of Caremark back in 2007.
Walgreen is a purer play on retail drugstores, though it has also had to adapt to a more competitive industry and reach customers through its own PBM business, worksite and home care facilities, as well as specialty pharmacies. But despite the added delivery channels, the sale of prescription drugs drives the company and has accounted for 65% of total sales for each of the last three fiscal years.
Many see Walgreen's store base as mature and slow growing. However, the company believes it can still double its store presence in the United States. This is supported by the fact that it is far from reaching saturation in many markets and that demographics highly favor increased prescription drug usage, given the aging U.S. population. Recent healthcare legislation will also bring millions of formerly uninsured individuals into the industry, which is expected to increase demand for pharmaceutical drugs and related healthcare services.
Action to Take ---> It's difficult to find a safer investment than Walgreen. Other firms may have higher upside potential as their operations are tied more closely to a business cycle that will improve significantly in a recovery. However, the timing of that improvement is uncertain and the economy could stall out numerous times before a recovery fully takes hold.
No matter the economic climate, Walgreens will continue to fill prescriptions and expand its retail foothold across the United States. If it can continue to grow profits in the double digits, then the shares are undervalued by at least 50%.
-- Ryan Fuhrmann