Which One Of These Drugstores Are You Looking For?
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Amidst all the difficulties prevailing all over the world, investing in any company is risky. Hence, it is important to select industries which never go out of style. One such industry is the drug industry. As long as people are alive, they will continue to buy medicine. Hence, the importance of retail drugstores comes into play. But not all industry players can survive economic pressures and perform well. Choosing the best one in the potential industry is the path for a healthy portfolio.
Some of the prominent players of the retail drugstore industry are Walgreen (NYSE: WAG), CVS Caremark (NYSE: CVS) and Rite Aid Corporation (NYSE: RAD). Each of them has been performing quite differently even though they operate in the same business environment.
One Company’s Loss Is Another Company’s Gain
While each of the company’s strategies are different from the other, there is one common factor which has been influencing their performance simultaneously. Express Scripts Holdings (NASDAQ: ESRX) manages prescription drug benefits for its clients such as employers and used to be a major contributor to Walgreen’s revenue since the latter used to fill prescriptions for the former’s members. However, this contract was not renewed in January 2012 which benefitted the other two competitors in a large way.
Both Rite Aid and CVS witnessed increasing prescription volumes because of the non-renewal of the contract. If we look at the earnings per share growth of the rivals for the last one year, the loss of Express Scripts to Walgreen will be obvious. The chart below shows the EPS growth of CVS and Walgreen since Rite Aid has been posting losses for quite some quarters now.
WAG Earnings Per Share Growth data by YCharts
Walgreen’s loss has been favorable to its competitors as more customers turned to them. This hampered Walgreen’s earnings by 4.6%.
Even if we look at the stock price performance of the three companies in the last one year, it depicts the same story.
Clearly, CVS Caremark has been the winner with a whopping return of 39% to its investors over the last one year. On the other hand, Walgreen has returned not even a percent due to various problems it has been facing, divorce with Express Scripts being one of them. Another problem was investors’ fear of Walgreen’s expansion in Europe through acquisition of Alliance Boots.
Rite Aid has performed better due to its list of strategies which has helped it largely. With increased focus on selling generic drugs, flu immunization programs, and a strong revamp of its stores have been quite influential in its recent quarter, leading to reduced losses. Since generic drugs have lower price tags compared to the branded ones it affected the top line slightly. However, it brought greater profitability which helped the retailer improve its bottom line from a loss of 11 cents per share to a loss of 5 cents. Rite Aid’s customer loyalty program can also prove to be beneficial going forward.
The strategy of customer loyalty program was first introduced by CVS Caremark, the benefit of which is evident in its performance. Its rewards structure attract host of customers, driving its pharmacy services business higher. Its recent acquisition of prescription drug plan has also been instrumental in its growth.
The Bottom Line
Not all companies in an industry can manage to perform well. Hence, it is indeed important to take note of the bright performers of the segment before investing. Recent performances of the industry players highlight CVS to be the winner. Walgreen, on the other hand, has been a laggard in terms of performance. Moreover, CVS’ new promotional efforts initiated recently with extra bonuses on the loyalty cards can drive further increase customer attention brightening its performance going forward. For Rite Aid, I believe being on the sidelines will be a safer option.
justhimanshu has no positions in the stocks mentioned above. The Motley Fool owns shares of Express Scripts. Motley Fool newsletter services recommend Express Scripts. 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.If you have questions about this post or the Fool’s blog network, click here for information.
