Tales of WAG, CVS and RAD
Dear Mr. Berko:
Would you please compare Walgreen Co. and CVS Corp. for me? I bought 450 shares of CVS that at $31 in March 2001 and CVS now trades for $25. I’m considering selling the stock and buying Walgreen Co. stock.
Please tell me, in plain English, why Walgreen is a better company than CVS. If your explanation makes sense, I will sell CVS and buy Walgreen. I would also like your opinion on Rite Aid. I plan to visit my brother, who would like your recommendations on Rite Aid. At $3.05 a share, he is thinking of buying 2,000 shares. So am I.
H.E. Durham, N.C.
Dear H.E.:
OK, here are eight simply worded comparisons of Walgreen Co. (WAG-$32) vs. CVS Corp. (CVS-$25).
1. WAG has zero debt and CVS owes banks, bondholders and the like more than $1.1 billion.
2. In 1997, both companies had $13 billion in revenues. However, by 2002 WAG’s revenues grew to $28 billion while CVS booked $24 billion.
3. In 1997, WAG had 2,358 locations averaging $5.5 million in average revenues per store and CVS operated 3,888 locations with $3.3 million ARPS.
4. Today, WAG has 3,880 stores with ARPS of $7.2 million and CVS has 4,087 stores, $5.8 million ARPS.
5. In 1997, WAG had $436 million in net income; in 2002, net income had increased by 130 percent to $1.1 billion. In 1997, CVS had net income of $380 million and in 2002 net income was $716 million which is an 88 percent increase.
6. In 1997, WAG’s net profit margins were 3.3 percent while CVS had net profit margins of 3 percent. Today, net profit margins for WAG are 3.6 percent while net profit margins have remained the same for CVS.
7. This year, WAG expects to open 425 new stores while CVS opens 275 new stores.
8. In the next five years, Wall Street believes WAG’s net income will increase by 120 percent to $2.2 billion vs. an 85 percent increase by CVS to $1.3 billion
Now those are eight shirt-sleeve, plain English comparisons. Both WAG and CVS retail the same products at nearly the same prices, from almost identical locations in probably identical demographic areas in practically identically sized stores. The reason CVS’s performance pales in comparison to WAG’s can be summed up in just one word: management. This is why I believe WAG is a far superior drugstore chain.
However, don’t sell your CVS to purchase WAG. While I believe WAG is a far better company, I’m uncomfortable with the fact that the shares trade at a very high 30 times earnings. CVS has a lot of room for improvement and its management is going to “drugstore-school” at night after work to learn how WAG does it. Some of the CVS crew are capable of acquiring new skills and I think there’s a good possibility they will use these skills to improve performance.
In the coming four to five years, I think CVS could get its net profit margins up in the 3.6 percent to 3.8 percent area and the stock could trade at 20 to 23 times earnings. I think that in the next four to five years, CVS shares could trade between $75 and $80 a share. While WAG will continue its progress in all areas, I don’t think the Street will continue to favor the company with a price-earnings ratio of 30 times earnings. In fact, I think the Street will lower WAG’s P/E ratio to the 24-26 level which will put the share price in the low to mid-$50 range.
Rite-Aid (RAD-$3.05) by comparison is raw sewage. While the company’s 3,400 stores produced $15.7 billion in revenues last year, new management is slow in turning the corner to profitability. The consensus indicates that RAD, after 5 consecutive years of losses (totaling $3.5 billion) will earn about $40 million in 2003 on $16.7 billion in revenues and $70 million in 2004 on revenues of $18 billion. RAD is a riverboat gambler’s special and a rank speculation. Rather than spend your money gambling, I would suggest you use those funds, which you would certainly lose anyhow, to buy RAD. The odds are that you will lose that money at the crap tables in a few days. But if you take a crap-shoot with RAD, the odds are that it will take you a lot longer to lose that money. So you may enjoy it more. Meanwhile, you probably cannot deduct your gambling losses, but you should be able to deduct your loss on RAD if that investment comes up snake eyes.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or visit his Web site at www.berkoradio.com. (c) Copley News Service Visit Copley News Service at www.copleynews.com.