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Are CVS and Walgreens Stock Too Cheap to Ignore?

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Apr. 4 2019, Updated 8:06 a.m. ET

Valuation summary

CVS Health (CVS) is down 19.4% on a YTD basis as of April 3. Higher reimbursement pressure, deflation in generics, and low brand inflation are expected to hurt its earnings. The weak earnings outlook is taking a toll on its stock price.

Meanwhile, rival Walgreens Boots Alliance (WBA) also cited a similar reason for its underperformance and lowered its full-year earnings outlook. Weak quarterly results and reduction in guidance dented investors’ sentiment on WBA stock. Walgreens is down 19.7% so far this year.

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Given the recent decline, CVS Health stock is trading at a significant discount. As of April 3, CVS stock was trading at a forward PE multiple of 7.8x, which is about 47% lower than its five-year historical average multiple of 14.6x. Meanwhile, Walgreens stock trades at a forward PE multiple of 9.0x, which is about 44% lower than its five-year historical multiple.

Outlook

We expect near-term challenges to set the direction for these stocks and limit the upside. Analysts expect the bottom line of both these companies to decline in the short term, reflecting higher reimbursement pressure.

However, barring near-term headwinds, both CVS Health and Walgreens look attractive on the valuation front. CVS Health’s bottom line is expected to stabilize in fiscal 2020 and rise 7.0%. Also, CVS Health stock currently offers a dividend yield of 3.8%.

In comparison, Walgreens’s bottom line is also projected to remain low in the near term. However, management expects reimbursement pressure to dissipate in the coming quarters, which in turn, is likely to support earnings growth. Walgreens’s current dividend yield is 3.2%.

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