Walgreens Boots Alliance and CVS Health are both pharmacy giants, but which one offers the more promising rebound strategy?
Investing in pharmacy chains has been a challenging journey lately. Rite Aid, unfortunately, filed for bankruptcy and emerged from it, while its larger competitors like Walgreens Boots Alliance (WBA) and CVS Health (CVS) aren't thriving either. Although they're not in dire straits like Rite Aid, they're navigating rough waters with new CEOs and turnaround strategies.
If you're intrigued by the opportunity for a contrarian play, these two pharmacies could be worth considering. But which one is more promising at the moment?
Making a Case for Walgreens
Walgreens has endured a massive 77% value drop over the past three years. Tim Wentworth, its new CEO, took the helm 15 months ago and swiftly made some necessary changes. Wentworth has slashed the dividend, announced plans to shutter 1,200 stores, and is exploring various options, including asset sales.
Bullish believers argue that after such a severe beating, the stock could have reached its lowest point. The stock has gained momentum since the company's Q1 FY25 results on January 10, with investors heaving a sigh of relief due to the company surpassing revenue and EPS expectations. Sales for the period, ending Nov. 30, clocked in at $39.5 billion, exceeding the analysts' consensus estimate of $37.4 billion.
Wentworth continues to target 2025 goals to optimize the company's footprint, control costs, and improve cash flow. Executing those priorities successfully could translate into a stronger bottom line, making the healthcare stock a compelling turnaround play.
CVS's Strengths: Steadiness in Troubled Waters
CVS hasn't been as hard-hit as Walgreens – its stock has dropped by roughly 50% in the past three years – but its stronger financial performance might be the reason. Its diverse business has helped it stay afloat in the face of rising medical costs, although its bottom line has taken a hit.
CVS's new CEO, David Joyner, took charge in October and aims to stabilize the business. Joyner, with his 37-year background in healthcare and pharmacy benefits management, could provide the right guidance to steer CVS to a stable path. In the past, the company has struggled to provide reliable guidance, causing investors unease, but under Joyner, clearer guidance might help prevent major sell-offs and boost investor confidence.
While medical costs have eroded its earnings, CVS's diversified business offers promising opportunities. The company reported an operating profit of $832 million in the third quarter of FY25, a significant decline from the $3.7 billion operating profit in the previous year. However, its health services sector continued to grow, preventing a bigger plunge, and allowing the company to remain profitable, unlike Walgreens.
CVS's business diversity also offers it the flexibility to consider various long-term strategies, such as considering a spinoff of some business units. While the possibility of a spinoff is uncertain, it could prove beneficial in focusing on high-growth areas, resulting in a substantial cash infusion.
CVS: The Preferred Choice
Walgreens may appeal to contrarian investors due to its lower stock price, but it could be a value trap. The company's drugstore business might continue to wrestle in an increasingly competitive market, as online shopping continues to gain traction. Same-day delivery and the shrinking importance of neighborhood pharmacies could edge Walgreens out of the game.
Compared to Walgreens, CVS is still profitable, offers a more diverse business model, and has the potential for spinoffs. Even with its uncertainties, CVS looks like the better buy, delivering value and growth opportunities that set it apart from Walgreens.
Given the current market trends and the recent financial performances of both pharmacy chains, investing in their financial sectors could provide potential returns. If you're considering this route, CVS might be a more promising choice. Despite its 50% stock drop over the past three years, its diverse business model and strong financial performance have kept it afloat in the face of rising medical costs. With a new CEO who aims to stabilize the business and steer it towards a stable path, CVS could provide more reliable investment options compared to Walgreens, which has been hit harder with a 77% value drop.
