After underperforming its peers in the healthcare sector, shares of CVS Health Co. (NYSE: CVS) are now nearing a 52-week low price. Underperforming the Health Care Select Sector SPDR Fund (NYSEARCA: XLV) by as much as 14% over the past year, CVS stock is now dangerously close to its $64.4 a share low.
While there could be good reasons for this steep decline, investors could find comfort in comparing CVS to its only real competitor, Walgreens Boots Alliance Inc. (NASDAQ: WBA). Walgreens stock, like CVS, trades close to its 52-week low of $17.5 a share, though these two competitors differ in more than just price action.
Coming into choppy uncertainty, markets could soon consider the safety CVS stock offers through its low beta. However, the real reason investors could squeeze double-digit upside from CVS today—instead of Walgreens—comes from the company’s underlying fundamentals.
Earning Power Favors CVS, Driven by Fundamentals
[content-module:CompanyOverview|NYSE:CVS]As of 2023, the top U.S. pharmacies (ranked by prescription drugs market share) have heavenly worthy mentions. CVS took 25.7% market share, while Walgreens came in second place at 14.7%.
Because of this market share, CVS's financials will show a net income margin of up to 2.3%. While there is nothing to write home about, this is significantly higher than Walgreens' nonexistent margin. Posting a net loss of $6 billion in the past twelve months, Walgreens investors have fewer reasons to stick around.
CVS’s market share could be boiled down to more than location advantages. Walgreens’s gross profit margin stood at 18.6% in the past 12 months, above CVS’s 14.9%. A lower profit margin suggests CVS is willing to assume more costs to increase its audience, whereas Walgreens prefers to pass on costs to its customers.
More than that, CVS covers more of a physical presence, having 9,700 locations across the U.S., whereas Walgreens counts 9,700 locations. Covering 7.2% less ground than CVS places Walgreens at a disadvantage, and markets aren’t shy about making it obvious.
Wall Street’s Vote
CVS stock trades at 81% of its 52-week high, and despite being close to making a new 52-week low, it shows much better short-term momentum than Walgreens. Walgreens stock fell to only 51% of its 52-week high, suggesting little support keeping it from falling further.
Knowing this, bears and short sellers came in to raid Walgreens. Over the past month, its short interest rose by 10.4%. At the same time, CVS reported a net decrease in short interest of 20.8% during the same period, leaving more room for bulls to justify another potential leg higher.
Markets have another way of broadcasting their votes: they favor CVS. On a forward P/E basis, CVS commands a premium of 41% over Walgreens, having a respective 7.3x multiple over its competitor’s 5.2x valuation.
When it comes to analyst projections, CVS once again shows its superiority. With a 9.3% earnings per share (EPS) growth prediction, analysts see a more optimistic future than Walgreens’ expected decline of 3.1%.
Analysts at Piper Sandler Co. (NYSE: PIPR) see a valuation of up to $94 a share for CVS. The stock would need to rally by as much as 40% from today’s prices to prove these predictions right. On the other hand, Walgreens saw target downgrades from banks like Morgan Stanley (NYSE: MS) and the UBS Group (NYSE: UBS).
Come for The Prescriptions, Stay for The Cash Flow
According to CVS’s financials, the past twelve months showed investors a free cash flow (operating cash flow minus capital expenditures) of up to $10.4 billion, enabling management to buy back $2.1 billion worth of stock, representing 2.5% of the company’s size.
Because stock buybacks typically mean that insiders believe the stock is on the cheaper end and could keep moving higher, investors have another item to keep on for their CVS bull cases. More than that, buybacks are a more effective way to repay shareholders, as dividends – the alternative – suffer from double taxation.
Speaking of which, Walgreens pays a 5.6% dividend yield today, though it isn’t funded by free cash flow. As of the past 12 months, Walgreens’ financials flow a negative $1.8 billion in free cash flow, meaning the $1.6 billion paid in dividends was funded from the $18.8 billion of issued debt… Yikes.
Being part of the consumer staples sector, CVS can afford its 3.9% dividend at no risk to shareholders as it is more than affordable. Potentially filling every investor’s trifecta, CVS stock’s near 52-week low could make for a potential watchlist addition today.
