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CVS Caremark Corporation (CVS), Walgreen Company (WAG), Express Scripts Holding Company (ESRX): What Is the Best Play on Retail Pharmacies?

Alternative plays: Walgreen and Express Scripts

Walgreen Company (NYSE:WAG) is often mentioned alongside CVS, and is very close in both size and range of products offered. Walgreen Company (NYSE:WAG)’s pharmacy business is actually a bit larger, having filled 784 million prescriptions last year at its 8,400 locations in all 50 states. While Walgreen Company (NYSE:WAG) is projected to have similar growth as CVS in the coming years, its valuation looks a little higher at the present time, currently trading for 16 times earnings.

The company’s revenue actually has dropped a bit since 2011 with their PBM contract with Express Scripts Holding Company (NASDAQ:ESRX) expiring, which caused customers covered by their plans to go elsewhere for their prescriptions. Although the companies resolved the situation and Walgreen Company (NYSE:WAG) is again part of Express Scripts Holding Company (NASDAQ:ESRX)’s network, not all of the lost customers have returned, and the full extent of lost revenues because of the situation remains unknown.

Speaking of Express Scripts Holding Company (NASDAQ:ESRX), the PBM giant also deserves a look as a viable alternative in this sector. The company has grown its revenues rapidly over the last few years and recently acquired Medco Health Solutions, which effectively doubled the company’s annual sales. Express Scripts Holding Company (NASDAQ:ESRX) trades for 15.1 times this year’s expected earnings, the lowest valuation of the three. Additionally, the company is projected to grow its earnings by 15.1% and 13.7% in 2014 and 2015, respectively, also the best of the three. However, consider that 100% of this company’s revenue is dependent on one source (PBM), and this creates an added risk.

Final thoughts

While all three of these companies would make an excellent addition to your portfolio, I prefer CVS for its leading position, good valuation, and ambitious growth strategy. The company also has an excellent record of creating value for its shareholders through both dividend increases and share buybacks, and with a payout ratio of below 20%, CVS should have no problem keeping up its increases in the future.

The article What Is the Best Play on Retail Pharmacies? originally appeared on and is written by Matthew Frankel.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Express Scripts. The Motley Fool owns shares of Express Scripts. Matthew is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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