Without Walgreens You Are Missing Health Care's Transformation
Dana is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The transformation of American health care – more preventive care, more customers with insurance – remains controversial. But it's ongoing.
Both chains have opened mini-clinics in some of their stores, where nurse practitioners and physicians assistants perform many functions general practitioners have in years past. These clinics have only just begun to impact results.
And if you believe in the clinic story, you're better off with Walgreens.
Walgreens: A Total Transformation
Walgreens wasn't first into the clinic business model, but it has moved very aggressively.
By signing deals with major health insurers to cover Medicare patients, and by getting into both the diagnosis and ongoing care of chronic conditions like diabetes, Walgreens has shown leadership in expanding use of the clinics, which were originally built to handle simple functions like closing cuts and treating fevers.
The best news for shareholders is that these clinics are proving even more popular with high earners than with the middle class they were first created to serve. A recent Kalorama survey, for instance, found 59% of clinic users earned over the median family income of $50,000. “What you've got is a person with money” visiting clinics, the company concluded.
Walgreens is trying to increase how much money they get from these people by redesigning its stores into one-stop lifestyle centers, with food, wine, coffee and wellness services in addition to medicines and medical care.
The result has been an accelerating top line. In the last three months the company has reported same-store sales gains of 2.3%, 3.8% and 4.3%. The company's most recent fiscal quarter ended in May, and it's due to report earnings June 25. The consensus earnings estimate if 95 cents per share, with some thinking it could go as high as $1.05.
Shares peaked last month at almost $51/share, and are now hovering near $49. Technicians show substantial bearish sentiment on the stock, so it should remain under pressure going into earnings.
If the company can hit its earnings estimates, however, and sustain that momentum through the year, the forward PE of the shares comes out as closer to 12 than their current level of nearly 22. I happen to buy the transformation story, which is why I'd buy Walgreens.
Why CVS Can't Follow
CVS Caremark was first to market with its Minute Clinics and has made substantial gains in states like Massachusetts, near its base in Rhode Island, where health reform is already well-along. But it hasn't been nearly as aggressive as Walgreens in transforming its stores, or enhancing the value of those clinics.
The reason is in the name. Caremark is a Pharmacy Benefit Manager, or PBM. It competes with ExpressScripts, but it's also tied closely to the older fee-for-service health model that health reform challenges directly. If CVS were as aggressive as Walgreens, in other words, Caremark might suffer.
Last year, the Caremark drag was a Caremark boost, as CVS benefitted from Walgreens' spat with ExpressScripts. The two finally made peace in the middle of the year, and since then Walgreens has outperformed CVS by a margin of 3-1, rising 60% against CVS' 20%.
CVS stores are far more traditional than those of Walgreens. They feature general merchandise in a well-lit space with a pharmacist on one end. The idea always was that people would bring in doctors' prescriptions, and shop while having them filled. But this model has long been under threat from grocery stores like Kroger and discounters like Wal-Mart, which can offer aggressive pricing on the prescriptions and more shopping.
CVS, in other words, is boxed-in between a model facing increased competition and its ties to traditional medicine, which so far are keeping it from moving against Walgreens aggressively. It has to recognize that's a problem, then find a way to address it – perhaps by selling or spinning-off Caremark – before the relative performance of these two stocks will change.
My Foolish Take
If you believe the health reform law is not going to be repealed, which whatever your politics is the way to bet, then Walgreens remains better positioned than CVS to take advantage and remains a better investment. A move by CVS to address its problems decisively is the only thing that would change my view of this.
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Dana Blankenhorn has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!