hi I'm Jimmy in this video I'm gonna walk through my analysis of the
Walgreens boots Alliance ticker symbol WBA and CVS health ticker symbol CVS
this is the 30th video in our series who are analyzing all 30 stocks in the Dow
Jones Industrial Average technically this video is supposed to be just for
Walgreens but there's a lot of things going on the industry so I thought it
made sense to compare Walgreens stock to CVS stock this is the final company
analysis video in this series up next in the series we're going to build the
three different portfolios that we've been after a dividend portfolio on value
portfolio and a growth portal you could see a link in the description
below to all the other videos in the series right now there's 29 you found us
a later date you might have all of those and hopefully the portfolios okay so
both CVS and Walgreens operate retail pharmacies Walgreens has about 14,000
locations in the US and internationally and CVS has just short of 10,000
locations now one of the reasons that Walgreens has more locations than CVS is
that Walgreens recently closed its deal with writing to purchase just short of
2000 stores this helps give Walgreens a bit of an edge as far as store locations
this also speaks to the fundamentally different approaches of the two
businesses path so while Walgreens was off buying Rite Aid stores while CVS was
diversifying a bit away from stores and they bought Aetna and this difference
has changed a real lot about their businesses so this is a chart of revenue
for both Walgreens and CVS and now I kept them separate because I don't think
that they should be compared to side-by-side because technically
Walgreens year ends at as of August 31st and cvs's ends on December 31st so I
didn't want to put them side-by-side to make it look like we should compare one
to the other it's really the general trend of the two that I'm after now I
have the charts scaled the same way so we can see from a numerical basis how
the number how the two companies compare to each other but that may not do
Walgreens much justice because when we rescale these charts based on their own
numbers well we can see that Walgreens has had a better growth rate as far as
revenue is concerned than cbss Walgreens growth has grown at a compounded annual
growth rate of the past five years at almost 13 percent
while CVS has put up about nine percent but as you may notice analyst estimates
those are the green bars well they seem to be telling a story that they expect
for CVS to grow at a faster rate than Walgreens going forward so let's look
for a moment at what's happening with the two companies and with the industry
in general and then we'll try to come up with a fair value for this for both
Walgreens stock and CVS is stock so let's start with Walgreens so Walgreens
has been one of the largest place in the u.s. prescription drug market for many
years then a few years ago in back in 2014
Walgreens goes out and buys Alliance boots boots is the British pharmacy
store and overnight Walgreens has an international exposure well a few
years later Walgreens continues their push to expand their stores and they go
out and they try to acquire Rite Aid another pharmacy they end up losing a
bid for the whole business but as I mentioned before they were able to buy
just short of 2000 stores now this brings us to a potential issue so the
industry in general is facing a few headwinds primarily revolving around the
pricing of drugs now in the United States which is where most of CVS's and
Walgreens is revenue comes from while drugs have been known drug prices have
been notoriously high now for a long time they've gotten away with it because
insurance companies paid a large portion of those drug costs this allowed for
drug companies and pharmacies to take their profits but lately pharmacy the
tire pharmaceutical industry has been feeling a ton of pressure especially in
the United States health insurance companies have begun to offer more and
more high deductible insurance plans and essentially this makes filling
prescription drugs more expensive for the average consumer at least more
expensive than it was just a few years ago so more than ever before pharmacies
like CVS and Walgreens where they're starting to be forced to compete on
price and not just let's say the breadth of their offerings well now this brings
us over to something called pharmacy benefit management and basically this is
one a representative of a company or a group deal with a group like CVS or
Walgreens essentially what they say is hey I represent this or
this company whatever it might be and we want to get a group rate on medicines
from your pharmacy again this lowers the margins for either a Walgreens or CVS
but in this scenario the Pharmacy Benefit manager is likely to only cut
that deal with either a Walgreens or CVS they're likely not to cut it with
multiple places so in that case the pharmacy will take a haircut on margins
but they get to lock up volume for their business and that seems to be a good
thing it seems to be something that's where it's all heading and there would
they seem to be willing to accept it so it turns out that one of the issues that
Walgreens is running into is that their margins of being forced lower and they
have limited leverage to negotiate with these pharmacy benefit managers so as I
mentioned in the beginning of the video CVS on the other hand will they went out
and acquired Aetna and Aetna happens to be one of the largest pharmacy benefit
managers on the planet so clearly CVS has locked up that
business and I personally think that this was a brilliant strategic decision
relative to just expanding the number of stores of behalf then there's even more
headwinds coming down for the industry so back in 2018 Amazon bought pill pack
which is essentially an online pharmacy so clearly that's going to be a headwind
plus you have companies like Walmart Google Berkshire Hathaway Apple JPMorgan
Chase they're all doing different things to take a swing at the industry so we're
gonna have to see how all of that directly competes with both CVS or
Walgreens many of them are talking about focusing on the insurance side of the
business but either way we're gonna to see how all that shakes up wherever they
go they're going to have a lot of pricing power now with all these
industry problems in mind I think that CVS is making more moves to become the
dominant player in the industry but I don't want to make it sound like
Walgreens is just standing idly by they have deals with LabCorp Kroger they have
a deal with they partnered up with Birchbox recently they also cut a deal
with FedEx so you can now pick up or drop off packages at Walgreens for FedEx
so they're doing what they can to balance out their own business so that's
the overall industry backdrop and clearly the industry is taking some hits
and both CVS's stock and Walgreens stock have the lumps to prove it this is a
chart of Walgren stock over the past year and
since the peak right here while the stock is down about 38 percent and I'm
accounting for the fact that they paid out to different dividends during that
time period walgreens has a dividend right now of about just short of 3% and
I think this is a good thing to consider because that could be a good addition to
the dividend portfolio when we switch over to CVS's stock chart well during
the same time period from the peak to recently well their stock was down about
31 percent so not much better and they also have their dividends in there they
have two dividends as well but their dividend yield is a little bit better at
about three and a half percent now this drop right here this drop was right
around earnings time and they also got some analysts down rates and if we jump
back to the Walgreens chart well we can see right here this is when CVS
announced their earnings and then this drop right here well this is when
Walgreens announced their own earnings and I just wanted to point out how much
investors tied these two stocks together okay so now let's go ahead and try to
value them so we both we know that both stocks have fallen but have they fallen
enough to make them a good value let's start with CVS so this is a chart of CVS
is free cash flow and the green bars are analyst estimates I found those on
Bloomberg and essentially I just took as estimates for free cash flow and now
we're going to convert that to a discounted cash flow calculation so we
take our free cash flow projections from up here we discount them by a weighted
average cost of capital of 8.5% but then we apply a perpetual growth rate of 2.5%
and this gives us our fair value of 156 123 now technically this is the value of
the whole company and this is a number we would use for both investors in bonds
and investors in this stock now generally this is where I would stop and
we'll see a more in-depth look at how we did all these calculations when we
publish our discounted cash flow video and we'll be publishing that one soon
but for now if all we care about is the value of the stock then we can continue
on but if you're interested in the value of the firm well that's good for bond
investors well you can mostly just stop here but for stock investors so what we
should do is if we then take the value of the firm today and we subtract
long-term debt so in theory this gives us the value of the equity
now we take CVS's equity value we divide that by the shares outstanding and we
get the fair value of the stock of about $64 per share okay it's simple enough
now let's switch over to Walgreens stock and we'll then we'll wrap it up with
some charts okay so with the exact same concept here in fact I use the exact
same weighted average cost of capital and the same perpetual growth rate I
could probably make the case from mixing these two up but for what we're doing
here I think it makes sense to just to stick with the same ones so for
Walgreens after running the numbers we get a fair value of about $69 per share
for Walgreens stock now for both Walgreens and CVS I kept cash out of
this calculation now for Walgreens that wouldn't have made much of a difference
since they don't have much cash but CVS actually has a decent amount of cash so
we would have added a bit to their value but technically I could have added cash
much like we deducted debt now realistically we should have added cash
up here since this would in theory be available to both the bondholders and
the stockholders but I like to elect it to keep it off this calculation just to
simplify the process of it and if anything else it would simply make our
calculations a bit more conservative adding cash would have increased the
value of both of their shares so stick with what we have so this is a chart of
Walgreens stock and right here well this is a line for our calculated fair value
now Walgreens is currently trading at about fifty four dollars a share and we
calculated the fair value to be about 69 dollars a share so from $54 $69 about
28% upside ok looks pretty good perhaps the market oversold Walgreens stock when
we switch over to CVS is stock chart well the current price of CVS is
slightly over fifty four dollars a share and we calculated our fair value to be
about sixty four dollars a share so that's about a 19% upside so once again
perhaps the market oversold CVS' stock so should we buy CVS
stock or Walgren stock well for me I can easily make the case
that both of these belong the value portfolio the fact that Walgreens stock
is trading at a bigger discount to our calculated fair value makes sense when
you compare it to the current trading price of CVS - they
calculated fair value since I believe that CVS holds less risk than Walgreens
does so in theory are going to be what you're going to want to be compensated
for that greater risk by buying it at a larger margin of safety if you're
curious about when to buy a stock we actually did a video on that and you
could see a link in the description below for that there we dive into how to
apply a margin of safety to our calculated fair value so up next in our
dial of 30 series is to build these portfolios
now I actually plan on going ahead and putting both CVS's stock and walgreens
stock in the value portfolios and probably the dividend portfolios as well
since I both since I think that both CVS is dividend and Walgreens is dividend
they're safe really what I'm likely to do is to combine these two companies
into one position so let's pretend that our average position size our average
holding size is going to be 5 percent of the portfolio what I would likely do is
take these two and make them both two and a half percent that allows us to
diversify a bit and I think it'll better strengthen our position as investors to
take on the industry headwinds give this a little bit of wiggle room and I like
where they are broadly speaking as far as where they are right now trading
relative to our calculated fair value so that's my move what do you think what's
your move what does your research show you about these two companies let me
know what you think in the comments below and don't forget to stick around
to hit subscribe because we're coming out with these portfolios and our
valuation series is starting very soon and thank you for sticking with me all
the way to in the video hit subscribe hit thumbs up see in the next video
thanks