Walgreens or CVS Stock: Which Is a Better Value Buy?

• Walgreens stock is trading cheap. However, the stock’s valuation is low for a good reason.
• We expect persisting challenges to stall the recovery in Walgreens stock in the near term.
• CVS offers better growth at a lower valuation.

Walgreens Boots Alliance (WBA) and CVS Health (CVS) shares are trading at a low valuation multiple. So far, Walgreens and CVS stock have taken a significant beating this year. The stocks have fallen 22.3% and 8.7%, respectively.

The decline stems from continued pressure on earnings due to increased reimbursements. A higher generic dispensing rate and challenging retail environment pose a threat. However, CVS stock has shown a sharp recovery due to its stellar second-quarter performance. Also, CVS trades at a lower valuation multiple than Walgreens and offers better growth.

Walgreens stock continues to trade lower. The decline in the stock makes its valuation cheap. For instance, the company trades at a forward PE ratio of about 9.0x, which seems very low. Besides the low valuation, the stock offers a dividend yield of 3.5%. Although the stock looks cheap, it has a low valuation for a good reason.

Walgreens is struggling on the sales and margins front. The sales growth rate slowed down sequentially, which reflected a decline in retail sales in international markets. In the UK, the company’s comparable retail sales fell 2.6% during the last reported quarter. Meanwhile, the company’s comparable retail sales fell 1.1% in the US. Walgreens de-emphasized tobacco sales.

Notably, Walgreens’ adjusted EPS has fallen in the last two quarters. The company’s management blamed reimbursement pressure and lower retail sales for the decline.

We expect the company’s top and bottom line to stay muted in the near term and stall the recovery in its stock price.

Similar to Walgreens, higher reimbursement pressure also impacted CVS Health. However, CVS’s acquisition of Aetna drove its sales and earnings higher. CVS stock has risen about 11% since its second-quarter earnings on August 7.

The company’s sales and earnings recorded strong growth. As a result, the company raised its fiscal profit outlook. CVS expects to report an adjusted operating income $15.2 billion–$15.4 billion in 2019. Previously, the company expected to post an adjusted operating income of $15.0 billion–$15.2 billion. CVS’s adjusted EPS will likely be $6.89–$7.00 compared to the previous guidance was of $6.75–$6.90.

Notably, CVS stock trades at a forward PE ratio of 8.6x, which is slightly lower than Walgreens. The company offers a dividend yield of 3.4%. We expect CVS to outshine Walgreens with its sales and earnings in the near term. However, CVS’s adjusted EPS will likely fall in the second half of fiscal 2019. The fall would reflect reimbursement pressure and higher interest expenses. However, the company’s earnings will likely return to the growth trajectory in fiscal 2020.

Analysts have a “buy” rating on CVS stock. Meanwhile, most of the analysts recommend a “hold” on Walgreens stock.