Walgreens Boots Alliance, Inc. (WBA) in Deerfield, Ill., and Rite Aid Corporation (RAD) in Camp Hill, Pa., are popular drug stores in the United States. WBA is a pharmacy-led health and wellbeing company that operates through three segments—Retail Pharmacy USA; Retail Pharmacy International; and Pharmaceutical Wholesale. As of August 31, 2020, WBA operated 9,021 retail stores under the Walgreens and Duane Reade brands and six specialty pharmacies. RAD operates a retail drugstore chain, selling prescription drugs, nonprescription medications, health and beauty aids, household items, pet care, and other every day and convenience products. It also offers drug benefits under the federal government's Medicare Part D program and insurance offerings. As of April 28, 2021, the company operated approximately 2,500 retail pharmacy locations in 17 states.
Because the resurgence of COVID-19 cases has led to increased demand for testing and medicines, pharmacy companies are witnessing rising sales. The global pharmacies and healthcare stores market is expected to grow at a 5%% CAGR to $1.31 billion by 2025. So, both UNP and CSX should benefit.
While RAD has gained 2% in price year-to-date, WBA has surged 21.4%. WBA is a clear winner with 19% price gains versus RAD’s negative returns in terms over the past nine months. But which of these stocks is a better pick now? Let’s find out.
Click here to checkout our Healthcare Sector Report for 2021
Latest Developments
In an announcement dated September 21, 2021, WBA’s Walgreen Co. subsidiary is making a majority investment in Shields Health Solutions, an industry leader in integrated, health system-owned, specialty pharmacy care. The Shields model will expand WBA’s existing specialty pharmacy offering to develop further health system partnerships and coordinate care for people with complex, chronic conditions.
On September 15, 2021, RAD partnered with Clear Secure, Inc. (YOU), the secure identity company, to offer its customers the ability to access and share their proof of COVID-19 vaccination with YOU’s digital vaccine card and Health Pass, which are accessible from their mobile devices. This digital vaccine card is likely to see high demand in the coming months.
Recent Financial Results
For its fiscal third quarter, ended May 31, 2021, WBA’s sales increased 12.1% year-over-year to $34.03 billion. The company’s adjusted gross profit came in at $7.21 billion, up 19% from the prior-year period. Its operating income was $1.46 billion for the quarter, representing an 82.8% increase from the prior-year period. While its adjusted net earnings increased 81.6% year-over-year to $1.31 billion, its adjusted EPS increased 81.9% to $1.51. As of May 31, 2021, the company had $1.35 billion in cash and cash equivalents.
For its fiscal first quarter, ended May 29, 2021, RAD’s revenue increased 2.2% year-over-year to $6.16 billion. The company’s adjusted net income came in at $20.93 million, compared to a $2.01 million loss in the prior-year period. Its adjusted EPS was $0.38, versus a $0.04 loss per share in the year-ago period. The company had $118.48 million in cash and cash equivalents as of May 29, 2021.
Past and Expected Financial Performance
WBA’s revenue and total assets have grown at CAGRs of 4.5% and 9.4%, respectively, over the past three years. Analysts expect WBA’s EPS to increase marginally in the current quarter, ending November 30, 2021, 1.6% in the current year, and 4.1% next year. Its revenue is expected to decline 7.3% year-over-year in the current quarter and 5.5% in the current year and rise 3.4% next year. The stock’s EPS is expected to grow at a 5.1% rate over the next five years.
In comparison, RAD’s revenue and total assets have grown at CAGRs of 4% and 3.9%, respectively, over the past three years. RAD’s EPS is expected to remain negative in the coming quarters of the current year and next year. Its revenue is expected to grow 4.4% year-over-year in the current quarter, ending November 30, 2021, 4.5% in the current year, and marginally next year. Analysts expect the stock’s EPS to decline at a 3.7% rate per annum over the next five years.
Valuation
In terms of non-GAAP forward P/E, WBA is currently trading at 10.05x, versus RAD’s negative 27.56x.
In terms of forward EV/EBITDA, RAD’s 15.87x is 22.6% higher than WBA’s 12.94x.
Profitability
WBA’s trailing-12-month revenue is almost six times what RAD generates. WBA is also more profitable, with a 3.6% EBITDA margin versus RAD’s 2%.
Also, WBA’s net income margin and ROE of 1.6% and 10%, respectively, compare favorably with RAD’s negative values.
POWR Ratings
While RAD has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, WBA has an overall B grade, which equates to Buy. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both WBA and RAD have a B grade for Value, consistent with their lower-than-industry valuation ratios. WBA’s 0.63x forward EV/Sales is 68.6% lower than the 2.02x industry average. RAD has a 0.28x forward EV/Sales, which is 85.9% lower than the 2.02x industry average.
WBA has a B grade for Sentiment, which is consistent with favorable analyst estimates. Analysts expect WBA’s EPS to grow at a 5.1% rate per annum over the next five years. However, RAD’s D grade for Sentiment is in sync with analysts’ forecast that its EPS will decline at a 3.7% rate per annum over the next five years.
Of the six stocks in the Medical - Drug Stores industry, RAD is ranked #4, while WBA is ranked #2.
Beyond what we’ve stated above, our POWR Ratings system has rated RAD and WBA for Growth, Momentum, Stability, and Quality. Get all RAD ratings here. Also, click here to see the additional POWR Ratings for WBA.
The Winner
Both WBA and RAD are well-positioned to benefit from the growing need for COVID-19 tests and medicines. However, we think its higher profitability and better earnings growth prospects make WBA a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Medical - Drug Stores industry.
Click here to checkout our Healthcare Sector Report for 2021
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WBA shares fell $0.17 (-0.35%) in after-hours trading Tuesday. Year-to-date, WBA has gained 23.81%, versus a 16.74% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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