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Walgreens and CVS Stocks Look Attractive despite Challenges

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Compelling valuation

Walgreens Boots Alliance (WBA) and CVS Health (CVS) shares have taken a beating. Bottom-line challenges due to reimbursement pressure and price compression spooked investors. Walgreens Boot Alliance stock has fallen more than 9% in the past few days. CVS Health stock has fallen ~3%.

Walgreens Boot Alliance’s top-line growth rate is projected to decelerate in the coming quarters. Less emphasis on tobacco, weakness in the United Kingdom, and currency volatility will likely remain a drag. The company faces tough YoY (year-over-year) comparisons. Deflation in generics, reimbursement pressure, and investment in growth labor will likely limit the bottom-line growth.

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Despite challenges, Walgreens Boot Alliance stock looks attractive on the valuation front. Walgreens Boot Alliance stock trades at 10.0x its fiscal 2019 estimated EPS of $6.49 and at 9.2x its fiscal 2020 estimated EPS of $7.02. Both valuations look attractive considering the projected growth rate of 7.8% and 8.2% during those periods and a current dividend yield of 2.5%.

CVS Health stock trades at 8.1x its 2019 estimated EPS of $6.88. However, the company’s EPS is projected to decline in 2019, which reflects the higher outstanding share count, price compression, and reimbursement pressure. However, CVS stock trades at 7.5x its estimated EPS of $7.44 in 2019, which looks attractive given the projected growth rate of 8.1% and a dividend yield of 3.5%.

Stock performance

CVS and Walgreens shares have fallen 14.6% and 5.3% on a YTD (year-to-date) basis as of March 4. Near-term pressure on earnings is hurting their stocks. However, higher volumes from stores and cost savings are expected to offset the pressure from reimbursement.

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