Walgreens Today Looks a Lot Like CVS Last Spring

Shares of drugstore giants CVS Health and Walgreens Boots Alliance were both pummeled in the spring of 2019. From December of 2018 WBA dropped over 41%, from north of $83 to $49. CVS fell 38.4%, from $83.90 to $51.70, over that same period. Since then, though, CVS recovered nicely. At its Monday close of $71.20, it had regained 37.7%. WBA had barely bounced, closing on Monday at $52.40. That's less than 7% from last year's low. Both stocks still appear underpriced, but that disparate price action suggests WBA is now the better buy. What leads me to that conclusion? From fiscal 2009 through fiscal 2019 -- which ends on Aug. 31 of same year -- Walgreens grew its EPS by 196.5% and its dividend by almost 271%. Its underappreciated current status left investors with only about one third as much in total return as the profit growth would have justified. Situations like that almost always end with catch-up moves which arbitrage away the mispricing. What is WBA really worth? Over the most recent decade WBA typically sold for about 15.9-times earnings while paying around 2.20% in yield. As of Friday it was offered for just 8.7-times fiscal 2020's estimate of $6 while providing 3.51% in current yield. That price-to-earnings, or P/E, on a fiscal year that is almost half over is lower than Walgreens multiple at its exact nadir in March of 2009. It yield is 56.7% higher than back then. Even a partial reversion-to-the-mean valuation supports an end of the summer target price of $84. Achieving that modest goal over a full 12-months would translate into nearly 65% in total return. Yet, $84 is far from an upper limit. WBA peaked between $78 and $102 during each of the five years from 2014 through 2018 and its current EPS are within pennies of an all-time high. I'm not alone in my positive view on WBA. Independent research house Morningstar calls Walgreens a 4-star, out of 5, Buy. It sees present-day fair value as $65. That figure appears overly conservative as it represents just 9.2-times this year's estimate. Yahoo Finance's logical goals would see WBA near $85 by the end of August 2021. There's nothing wrong with how CVS performed as a company over the past 10 years. Earnings per share grew by 167.3% while shareholders earned a well-matched 176.2% in total return. As with WBA, CVS' EPS have been stuck in neutral recently, but appear poised to accelerate again. Even after a good run, CVS is still cheaply valued by historical standards. A forward P/E of 10-times and a yield of 3% compare favorably with its long-term normal of 14.3-times and 1.71%. Morningstar sees CVS' present-day fair value as $92, implying an expanded multiple of 12.8-times by this time next year. Yahoo Finance is a bit less optimistic on CVS. Still, it sees $81.71, a gain of 14.4% plus dividends over the coming 12-months. CVS could do better than Yahoo's projection, which implies a P/E of just 11.9-times compared with a long-term normalized multiple of 14.3-times. There you have it. Both these high-quality, proven growth stocks look like winners. WBA appears to have more upside simply because it's further behind in its recovery than is CVS. Walgreens was the worst-performing of the 30 Dow Jones industrial average stocks during 2019. I'm betting it will be near the top of that list by Dec. 31 of this year. (CVS is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells it? Learn more now.)

Walgreens Today Looks a Lot Like CVS Last Spring

While both companies appear like winners, WBA should have more to gain because of its discounted price.

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