What follows is a list of pharmacy stocks that are well positioned to appreciate either as a takeover play, a turnaround play, or growth play. While Walgreen and Rite Aid fall into the first and second camps, CVS falls more into the last one. Despite these differences, all three of these firms are attractive brands well positioned to gain from an aging population. Accordingly, I believe reward far exceeds the risk in opening a long position for these stocks.
CVS Caremark (CVS)
CVS trades at a respective 17x and 12.1x past and forward earnings with a dividend yield of 1.4%. Consensus estimates for CVS' EPS forecast that it will grow by 16.8% to $3.27 in 2012, and then by 12.8% and 14.6% in the following two years. Assuming a multiple of 15x and a conservative 2013 EPS of $3.62, the stock would hit $54.30.
Humorously, CVS is not very humble about taking the lost Express Scripts (ESRX) customers from Walgreen (WAG). They openly advertise "Welcome Express Scripts customers" and are certainly not be shy pushing competitiveness. What makes CVS particularly attractive is its impressive scale as a pharmacy and 98% customer retention rate. By these metrics, the firm is heavily tilted towards reward over risk. Accordingly, it has been growing market share while competitors have struggled. At the same time, the aging population will drive greater healthcare spending.
Walgreen trades at a respective 11.6 and 11.8x past and forward earnings with a dividend yield of 2.6%. Consensus estimates for Walgreen's EPS forecast that it will decline by 0.8% to $2.62 in 2012 and then turnaround to grow by 9.9% and 9.4% in the following two years. Assuming a multiple of 15x and a conservative 2013 EPS of $2.85, the stock would hit $42.75.
Despite the devastating loss of the Express Scripts, management is still showcasing confidence over free cash flow. This confidence most notably came from the recent 28% hike in the dividend yield. The $225M BioScrip acquisition also makes Walgreen less of an organic growth play and more of a bet on undervalued pharmacy businesses. Walgreen is in full acquisition mode and would be able to slow CVS' gains only from greater regional exposure.
Rite Aid (RAD)
Rite Aid has been bleeding money with a $369M loss in FY2012. Even still, the company is free cash positive - a fact investors fail to appreciate. This makes Rite Aid a potential takeover target for pharmacies looking to catch up to CVS in size.
During FY2012, management also delivered impressive growth in the top-line. Management says that it is "pleased" to have "generated significant, positive momentum". Program enhancements and wellness+ cards have been a huge success with the latter accounting or 74% of front-end sales. I strongly recommend an investment in Rite Aid as a turnaround play.
Disclaimer: We seek IR business from all of the firms in our coverage, but research covered in this note is independent and for prospective clients. The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.