Now that the stock market is frothy, it makes sense to consider defensive sectors like discount retail and healthcare. Pharmacy is at the intersection of retail and healthcare, and now is a good time for investors to consider these stocks while other buyers are bidding up cyclical stocks. In addition, pharmacy stocks are one way investors can try to play the secular trend of America's aging population. In particular, CVS (NYSE:CVS) and Target (NYSE:TGT) are attractive ways to play this trend based on their increasing success in holding clinics and valuations that are as low as or lower than peers.
Target's pharmacy business is more attractive than the pharmacy business of Wal-Mart (NYSE:WMT). Wal-Mart launched its medical clinics back in 2007, with a projection of having up to 2,000 locations by mid-2012. Today, Wal-Mart has less than 130 clinics open, with a rate of more locations being closed than being opened. This apparently is a consequence of the company's business plan, in which the operation of the clinics was leased to third-parties, after which they get little to none support from Wal-Mart. As well, there have been many complaints that it is difficult for patients to pick up their prescriptions in the stores, as Geisinger Careworks CEO Kenneth Berndt said:
People would come back to the clinic complaining they'd been waiting an hour. Next time, they'll say, 'where can I get this done the quickest?
On top of it, advertisement of said clinics seems to be nearly non-existent, as the retailer doesn't promote the clinics or post outdoor signs for them.
Meanwhile, Target's clinics are growing. Target has opened 53 clinics in 6 states since 2006, and currently has plans to open 14 more this year. According to Associate Medical Director for Target, Dr. Kevin Ronnenbeerg, the retailer is taking its time to better understand the markets and the business, achieving a point in which expansion and continued investment are the course to follow.
Target is about as cheap in terms of price multiples as Wal-Mart. Both have price-to-sales multiples near 0.5, and both have price-to-earnings multiples between 14 and 15. With this in mind, Target is the better choice based on its growing clinics.
In contrast to Wal-Mart, CVS runs its own clinics. It has nearly 630 MinuteClinics open, with a trend of opening around three new locations per week. Its goal is to have 1,500 clinics in less than four years, something well within reach, according to the current trend. CVS also differs from Wal-Mart in that it has a strong promotional strategy that relies heavily in TV and Web exposure. According to CVS CEO Larry Merlo, MinuteClinic sales have surged more than 38% when compared with the last quarter of 2011, with patient visits also reaching unprecedented daily levels.
As nearly 85% of MinuteClinic patients are insured, the forecast is that demand for clinics will grow as more Americans gain coverage, serving as an overflow outlet as the number of Primary Care Physicians is lagging the increasing number of aging U.S. patients. According to the Association of American Medical Colleges, by 2020, the USA should be short by 45,000 general practitioners, and any business that capitalizes on such a shortage should fare well.
Clinics are staffed by nurse practitioners or physician assistants, who can offer treatment to patients with minor illnesses and injuries, give vaccinations and monitor patients with chronic diseases such as diabetes or hypertension. Two of their selling points are their availability and their low cost, as they are usually open during after-hours and on weekends. As well, their charge per visit is around $60 for an exam, a cost that most insurers cover. After being seen by a health professional, patients usually fill their prescriptions at the store's pharmacy and might buy other merchandise.
In contrast, Walgreen's (NYSE:WAG) clinics have stagnated. WAG started with 40 clinics in 2007 and increased them to 355 by 2009. As the recession halted further openings, Walgreen's currently stands at 364 clinics. Vice President of Take Care Health Systems Peter Hotz said:
Everyone who plays in this space is expecting a big bump on January 1, 2014. With President Obama being re-elected, it's full-steam ahead.
CVS has been more successful at growing its clinics and it is also more reasonably priced than Walgreen. Walgreen trades at a 19.03 price-to-earnings multiple, higher than the 17.7 multiple of CVS.
Target has been more successful at launching clinics than Wal-Mart. Since it trades at comparable price multiples, Target is a better way to play increasing drug sales.
Among pharmacy stocks, CVS is more attractive than Walgreen. It is the cheapest among pharmacy stocks in terms of the price-to-earnings ratio and has been more successful than Walgreen at launching clinics. CVS is another attractive buy candidate for playing increasing drug sales.