Walgreens vs CVS: Which Is The Better Buy?

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Everyone is likely aware of the blow-up between Walgreens (NYSE: WAG) and Express Scripts (NASDAQ: ESRX). The question is who benefits from this breakdown between the two? The short answer would seem to be CVS Caremark (NYSE: CVS). I'm sure that there will be some Express Scripts members who will go to other pharmacies, but in large part I'm willing to bet that CVS will be their next stop. With over 7,000 stores in 41 states CVS has the kind of market coverage that these jilted customers want. Let's see if the numbers support this theory and figure out which of these companies is the better buy. We'll keep score as we go and see what we find out. 

Name

Price

P/E on '12 earnings

Growth expected

PEG

Yield

Walgreens

$33.38

12.41

8.90%

1.39

2.70%

CVS

$42.69

13.22

10.46%

1.26

1.52% 

The two companies are closely valued with Walgreens sporting the higher relative price, but higher yield. (Even: 1 point each)

Let's check out how these two companies have done compared to analysts estimates. Walgreens has beaten estimates by just 0.20% on average the last 4 quarters. CVS has managed to beat estimates in the same time frame by 1.95%. Since Walgreens did miss last quarter and CVS has not yet this one goes to CVS. (CVS: 2, Walgreens: 1)

I always like to look at cash flow to compare companies. It helps give you an idea if the company has extra funds to increase dividends, repurchase shares, and make acquisitions. Walgreens has a positive net average cash flow of $311 million (after capital expenditures and dividends) in the last 4 quarters. CVS has a positive net average cash flow of $1.1 billion (after capital expenditures and dividends) in the last 4 quarters. With CVS producing more than 3 times the extra cash that Walgreens does this is a big point in their favor. (CVS: 2, Walgreens: 1)

Looking at the two companies balance sheets we'll compare using debt-to-equity. This is a close race with Walgreens at 0.16 and CVS coming in at 0.27. Given that both companies are very close and neither uses a whole lot of debt this looks like a tie to me. (Even: 1 point each).

Both companies have been raising their dividends and repurchasing shares in above average fashion so neither company has an advantage. (Even: 1 point each).

Intangibles is really where we separate the wheat from the chaff. Unfortunately, Walgreens is on the outs with Express Scripts and it's estimated Walgreens could lose about $5 billion in sales. These customers will all go someplace else and CVS seems like a likely choice for many. (CVS: 2, Walgreens: 1)

The totals are CVS: 9 and Walgreens: 6. The interesting thing is you could actually make the case just based on cash flow that CVS is the better opportunity. With over $1 billion of extra cash each quarter there is a lot the company can do for its shareholders. While its dividend is smaller today this extra cash would easily cover a significant dividend increase going forward. Both companies are top dogs in their industry, but CVS appears to have a better prescription for profits.


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