In a previous article we looked at industries that stood up well against recessions, providing protection and solid growth for portfolios. While not in the top 5, drug retailers were noted to have high levels of net margin and return on assets. The industry itself relies on the ever expanding needs of healthcare and growth of the aging population in the United States and globally. In this article we’ll take a look at the top fundamentally strong companies of the industry across a wide variety of metrics we pulled from StockMetrix.
#1 PetMed Express, Inc (NASDAQ:PETS)
PetMeds tops our list due to a number of strong investment ratios such as ROA and ROI to operating and debt ratios such as operating margin and current ratio. Though not what most people traditionally think of when one speaks about drug retailers, PetMedExpress is a direct to consumer pet medication, and other health products for pets. The company boasts an incredible 30.1% Return on Assets for 2018 (up from a whopping 23.6% in 2017), along with a Return on Equity of 35.5% and a Return on Invested Capital of 35.2%. Much of this is driven by the company maintaining a gross margin solidly above 30% for the better part of a decade along with a stable and widening operating margin of 19%. Most impressive is the substantial growth in Free Cash Flow, which other than a large CAPEX in 2016, has been consistently at $36M+ for the last 5 years. But best of all, the company holds no debt.
#2 Prestige Brands Holdings, Inc (NYSE:PBH)
With a strong balance sheet and operating margins leading to solid operating and gross margin ratios, as well as current ratios, Prestige Brands comes in at number two on the list. Prestige Brands markets, sells and distributes over-the-counter healthcare and household cleaning products. Brands you may be familiar with include Monistat, Nix lice treatment, Chloraseptic sore throat, Clear Eyes, and others. Though recently not as strong, the company maintains a 20.7% operating margin, with a fairly consistent Free Cash Flow above $150M a year. The stock currently sits at a P/E ratio of 5.81 TTM and Price to sales ratio of 1.87, along with a Price to Book ratio of 1.88. These all point to a potential value in the share price of a company that has demonstrated resilience in a resilient sector.
#3 Express Scripts Holding Company (NASDAQ:ESRX)
The only pharmacy benefits management company on this list, Express Scripts has been a high flying stock ever since its debut. Due to nice EPS growth as well as good efficiency ratios from margins & sales per employee as well as inventory turnover, they come in at number three on the list. They made waves in the news when they agreed to be bout ought by Cigna (NYSE:CI). Despite slim operating margins of single digits, the company’s EPS has been on a tear, climbing from $2.64 to $7.74 from 2014 to 2017. Express Scripts increased performance on both the ROE and ROI over the years to reach 24.9% and 13.6% respectively. With the M&A looming, its worth approaching this stock with added caution.
#4 Rite Aid Corporation (NYSE:RAD)
One of the stronger value plays on the list, Rite Aid boasts solid ROA, ROI, and ROE ratios as well as excellent P/E, P/S, and P/B ratios. Though not as well-known as its competitors Walgreens and CVS, Rite Aid operates drug and retail stores in the United States, as well as selling over-the-counter medications, health and beauty aids, as well as traditional convenience store merchandise. They recently made headlines when they agreed to a merger with Albertsons. The company boasts a strong ROE and ROA, with tepid share prices, mainly driven by the upcoming merger. However, anyone looking at the stock should note that even with strong fundamentals, M&A should always be approached with caution.
#5 AmerisourceBergen Corporation (NYSE:ABC)
With a global reach Amerisource Bergen sources and distributes pharmaceutical products across the globe. You might be surprised to see this company on the list given it’s volatile ROE, at 17.4 for 2017, low ROA (1.06 for 2017), and slim gross and operating margins of 2.97% and 1.29% for 2017. Yet, the company is a powerhouse when it comes to running its operations efficiently. They maintain a G&A to sales ratio of 2.04, inventory turnover of 12.78, and asset turnover of 4.38, which puts it at number five on the list. Essentially, they do their work a lot more efficiently a lot faster to drive volume and profits. However, because of their slim margins, any significant deviations can throw their profits out of alignment very quickly.
Immunize Your Profits
The five companies listed span a pretty wide spectrum of drug retailers. Some, like Rite Aid, operate regular traditional drug stores that most people are familiar with. While companies like PetMeds stick to the online retail space. Nonetheless, each of these companies works on the notion that people will consistently and constantly need healthcare products for themselves and their families. It’s important to evaluate each of these companies within its own rights as a high volume turnover company such as AmerisourceBergen doesn’t show the same metrics and figures as PetMeds. Yet, they have been around much longer, and exist in a better defined and more stable part of the industry. All in all, it’s worth finding the stock that best fits your investment strategy considering it for your portfolio.
All research was carried out using StockMetrix mobile app.
I have no interest in any stocks mentioned, and no holdings in those companies. This article presents only my opinions. I am not receiving compensation for it. I am not in any way associated with any company mentioned in this article.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.