3 Drug Retailers That Own the Market
But there are significant challenges for these companies even though the long-term, overarching industry trends are highly positive and analysts are upbeat on their prospects.
On the upside, these companies' sheer size provide them greater leverage in negotiating prices with drug wholesalers, while national demographics favor growing demand for drugs as baby boomers lurch into their retirement years. Also, a rising number of annual patent expirations for brand-name drugs are starting to hit this year, which improves retailers' margins. Finally, consumers are increasingly accepting mail-order drug delivery, resulting in a low-cost component to companies' operations.
But a wildcard to all that is whether the Supreme Court will approve the Obama administration's proposal that would force health-care insurance on the populace.
If that's approved, it would serve to boost drug sales, but retailers would face more government scrutiny in administering those programs, which would put pressure on profits.
The most recent industry-shaking event of late, the $29 billion merger of Express Scripts
Pharmacy-benefits managers are third-party managers of drug-prescription programs, most typically for health insurers. They have agreements with drug retailers to dispense the drugs for them so the retailers depend on them for significant business under lengthy contracts, and their increasing power is another factor retailers will have to contend with to protect earnings.
The biggest player in drug retailing is CVS Caremark
It goes head-to-head with Walgreen
But it now faces a huge challenge due to the loss of its contract with Express Scripts at the end of 2011. That could hurt its results significantly, unless it can renegotiate. The loss of that relationship hurt second-quarter results by 7 cents per share, the company said in reporting earnings of 78 cents per share two weeks ago.
"With a large percentage of CVS stores located within close proximity of a Walgreen location, we believe CVS will be the primary benefactor of a disruption in Walgreen's business," writes Joseph Agnese, an analyst for S&P Capital IQ.
In third place among drug retailers is Rite Aid
Standard & Poor's analysts said in a March 13 research note that the "national chains are well positioned as their pharmacy departments continue to gain in importance, with prescription sales increasing in the low single digits on a comparable-store basis and approaching 70% of total sales."
The drug-dispensing part of the business also provides a magnet for consumers that results in a sustained relationship and sales of other goods with each visit. According to the National Association of Chain Drug Stores, the average distance to the nearest pharmacy is 1.6 miles, which makes pharmacies among the most convenient sources of health-care goods, basic consumer items and increasingly, food products, which can provide higher-margin sales than some drugs.
Here are summaries of the nation's three leading drug retail chains ranked in inverse order of "buy" ratings:
3. Rite Aid
Company profile: Rite Aid, with a market value of $1.6 billion, operates about 4,700 units in 31 states, making it the third-largest drug-store chain in the U.S.
Investor takeaway: Its shares are up 31% this year and have a three-year, average annual return of 55%. Analysts give its shares one "buy" rating, one "buy/hold," four "holds," and two "sells," according to a survey of analysts by S&P.
S&P analysts say "we see profitability being pressured in the near term as an intensely competitive environment pressures non-pharmacy sales and from increased drug-reimbursement pressures."
Company profile: Walgreen, with a market value of $28 billion, is the largest U.S. retail-drug chain in terms of revenues with $72 billion in 2011. It operates more than 8,000 drug stores.
Dividend Yield: 2.79%
Investor takeaway: Its shares are down 1.9% this year and over five years have an average annual loss of 5.6%, which means that $10,000 invested five years ago would be worth $7,923 today. Analysts give its shares eight "buy" ratings, four "buy/holds," 11 "holds," two "weak holds," and two "sells," according to a survey of analysts by S&P.
S&P analysts downgraded Walgreen to "hold" from "buy" on March 16 on valuation concerns. March same-store sales were 6.8% lower than last year and total sales 4.3% lower, while prescriptions filled at comparable stores fell 11%, in part due to the company no longer being part of the Express Scripts pharmacy network.
1. CVS Caremark
Company profile: CVS, with a market value of $58 billion, is one of the nation's largest retail-pharmacy chains with 7,000 retail pharmacies and more than 500 retail health clinics, coupled with one of the biggest pharmacy-benefit managers since its 2007 merger with Caremark.
Dividend Yield: 1.46%
Investor takeaway: Its shares are up 7% this year and have a three-year, average annual return of 14%. Analysts give its shares 10 "buy" ratings, 10 "buy/holds," three "holds," and one "weak hold," according to a survey of analysts by S&P. For fiscal year 2012, analysts estimate it will earn $3.29 per share and that will grow by 12% to $3.69 per share in 2013.
S&P has it rated "strong buy," with a $54 price target, a 23% premium. "We expect total sales in 2012 to rise 12.5% to $121 billion, reflecting the signing of new pharmacy-benefit management (PBM) clients," it said.