CVS Trumps Walgreen on Stock Valuation

Includes: CVS, WBA
by: Erik Dellith

The two largest US drugstore chains - CVS Corp. (NYSE:CVS) and Walgreen Co. (WAG) - beat analyst revenue projections in August, and the stocks edged higher on Tuesday. In a side-by-side comparison, CVS shares seem to be trading at a more attractive valuation.

Walgreen and CVS have been growing their revenue at consistent, low-double digit clips, but Walgreen has the faster five-year average pace. Although CVS has been expanding at a faster clip over the trailing 12-month [TTM] period and in the most recent quarter [MRQ], the latest string of same-store sales figures weighs in Walgreen's favor: Walgreen's August increase of 10.6 percent followed July's up-tick of 16.1 percent. Meanwhile, CVS's gain of 8.9 percent came on the heels of July's 9.5 percent advance.

Although both firms have expanded their top lines slower than the industry averages, it is important to remember that it is easier to post faster growth rates when working off of a smaller base.

Learn about Growth Rate Ratios

Based on TTM revenue and earnings per share [EPS], we see that Walgreen is priced at a premium. By comparison, CVS's price tag according to price to earnings [P/E] and P/Sales is not only below Walgreen's, but is also below the industry average.

Learn about Valuation Ratios

While valuations based on past performance are useful for providing quick comparisons, it is important to remember that stocks are valued on the basis of expected future performance. As such, we turn our attention to analyst expectations of EPS for the current and next fiscal years. For Walgreen, this means the year ending August, while CVS uses a calendar year.

Walgreen's stock is trading at about $50. On average, analysts in a Reuters poll look for the company to post EPS of $1.71 in fiscal year 2006 and $1.99 in fiscal 2007. CVS is currently trading at roughly $34.65, and analysts look for the company to earn $1.51 per share this year and $1.86 next year. As indicated below, this means that WAG has much higher forward P/E ratios than CVS. Dividing the forward P/E figures by the consensus of analyst estimates for long-term EPS growth rates for each company yields PEG ratios. Lower PEG ratios indicate "cheaper" valuations. More-conservative value hunters generally prefer to focus exclusively on companies with PEG readings that are below 1.00, but numbers slightly north of this threshold are still within value territory. By this measure, too, CVS has the more appealing price tag.

At the time of publication, Erik Dellith did not directly own puts or calls or shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.

Note: This is independent investment and analysis from the investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by