Questions 15 Pages 5: As An Investor, Discuss Which Company

Questions15 Pages5 As An Investor Discuss Which Company You Would C

As an investor, the decision to invest in CVS Health Corporation or Walgreens Boots Alliance requires a comprehensive analysis of both financial and non-financial factors. The retail pharmaceutical industry in which these companies operate is growing, driven by an aging population, increasing healthcare needs, and a shift towards more accessible healthcare services. Both companies are established players with extensive networks and diversified services, yet their strategic positioning, financial health, and market trends differ significantly.

CVS Health, founded in 1963 and headquartered in Woonsocket, Rhode Island, is a leader in integrated healthcare retail, operating over 9,000 locations nationwide. Its diversified offerings include retail pharmacy, healthcare clinics, diabetes management, home health services, and a prominent pharmacy benefits management (PBM) division. CVS's strategic focus on integrating health services with retail operations positions it well in the evolving healthcare landscape, emphasizing convenience and comprehensive care. The company's expansion into health clinics and emphasis on innovation suggest a positive growth trajectory, supported by its robust financial performance and market penetration.

Walgreens Boots Alliance, formed through the 2014 merger of Walgreens and Alliance Boots, is headquartered in Deerfield, Illinois, with a similar footprint of over 9,000 retail locations. Walgreens operates in traditional pharmacy retail and offers wellness products, vitamins, and personal care items. Its wholesale division supplies medications to other retailers and healthcare providers. As a company rooted in the U.S. market but with a significant European presence, Walgreens faces a competitive and highly regulated environment, with rising online and mail-order pharmacy competition. Its strategic emphasis on expanding digital presence and partnerships with other healthcare entities are vital for future growth.

The industry landscape is highly competitive, with players competing on price, convenience, and service quality. The growing demand for prescription drugs, an increasing preference for generic medications, and the rise of online pharmacies, including Amazon and other tech-driven entrants, pressure traditional brick-and-mortar pharmacies. Despite industry challenges, the market remains lucrative, with healthcare spending reaching over $450 billion in 2020, fueling continued growth opportunities.

Financial Analysis Using Current and Debt Ratios

Assessing liquidity and leverage reveals critical insights into each company's ability to meet its short-term obligations and manage debt. As of November 30, 2022, Walgreens' current ratio stood at 0.70, indicating that its current assets are insufficient to cover current liabilities, which signifies potential liquidity concerns. Conversely, CVS's current ratio of 0.94 suggests a relatively better liquidity position but still below 1.0, indicating tight working capital management.

Debt ratios further inform financial stability. Walgreens’ debt ratio is 12%, derived from total debt of approximately $10.6 billion relative to assets of $90.1 billion. CVS’s debt ratio is higher at approximately 27.5%, with debt totaling $63.8 billion against assets of $231.2 billion. Although CVS has more debt in absolute terms, its higher asset base provides a buffer for debt servicing, while Walgreens’ lower debt ratio indicates less leverage but also weaker liquidity.

Both companies face potential risks; Walgreens’ low current ratio underscores liquidity vulnerabilities, which could impact short-term solvency. CVS, with a more favorable debt ratio and higher current ratio, demonstrates a more stable financial stance, increasing its capacity to pay obligations and sustain operations during downturns.

Profitability and Operating Performance

Examining profitability ratios elucidates each company's ability to generate earnings and utilize assets efficiently. CVS’s return on equity (ROE) has improved from approximately 11% in 2020 to about 24% in 2022, indicating enhanced profitability and better utilization of shareholders’ equity. The return on assets (ROA) also increased, reflecting improved asset efficiency, alongside a rising fixed asset turnover ratio that confirms effective utilization of fixed assets in generating sales.

Walgreens’ ROE increased from about 2% in 2020 to roughly 20% in 2022, suggestions of significant gains in profitability. Its ROA similarly rose from 1% to 5%, and the fixed asset turnover ratio displayed a fluctuating but generally improving trend. However, Walgreens’ ratios are less consistent, and its lower asset base relative to sales points to potential operational inefficiencies or market challenges.

Overall, CVS exhibits stronger profit margins and more consistent operational efficiency improvements, signifying superior performance over the past three years. This indicates that CVS’s strategic initiatives in health services integration and operational efficiencies are paying off, whereas Walgreens, despite notable improvements, still faces structural challenges.

Market Performance and Shareholder Satisfaction

From a market perspective, CVS’s stock has demonstrated growth with an increase from an average of $67.46 in March 2018 to $88.21 in January 2023, translating to an annual growth rate of approximately 13.17%. This consistent upward trend, augmented by a strong pandemic phase centered on vaccine distribution, suggests investor confidence and shareholder satisfaction.

In contrast, Walgreens’ stock price declined over the same period from approximately $70.58 to $36.86, indicating significant devaluation and potential shareholder dissatisfaction. Although Walgreens experienced recovery in some years, the overall negative trend reflects market perceptions of its financial performance and strategic position.

Financial ratios like the price-to-earnings (P/E) ratio further support these observations. CVS’s P/E ratio of 35.97 as of 2023 indicates investor optimism about growth prospects, whereas Walgreens’ negative or very low P/E ratio (-10.5) reflects market skepticism and lower expected earnings recovery.

Investment Decision and Rationale

Considering all financial and market indicators, I would prefer to invest in CVS. Its stronger financial stability, higher profitability ratios, consistent growth in stock price, and positive market sentiment make it a more attractive and less risky investment compared to Walgreens. While Walgreens has potential, especially if it can improve liquidity and operational efficiencies, its current trajectory and market valuation present higher risks.

Furthermore, CVS’s strategic focus on healthcare integration, expanded health services, and resilient business model align well with long-term industry growth trends. Its ability to adapt to emerging healthcare needs and technological advances enhances its investment appeal, providing a safer option for capital appreciation.

Non-Financial Criteria in Investment Decisions

Beyond financial metrics, non-financial factors are crucial in shaping sound investment decisions. Economic conditions influence retail and healthcare sectors significantly; during economic downturns, discretionary spending decreases, impacting revenues. Assessing the overall economic health, inflation rates, and regulatory landscape helps gauge future performance.

Personal risk tolerance, financial stability, and existing debt levels also impact investment decisions. For instance, investors with high debt or limited emergency funds should prioritize liquidity and risk mitigation strategies.

Corporate social responsibility (CSR), ethical practices, and reputation are increasingly influential. Companies prioritizing sustainable practices, diversity, and community engagement often better withstand reputational risks and align with investor values.

Innovation, technological adoption, and strategic partnerships further enhance a company's growth prospects. CVS’s investments in digital health solutions and Walgreens’ efforts in online pharmacy expansion exemplify the importance of innovation.

Lastly, regulatory environment and healthcare policy developments can dramatically affect pharmaceutical retail operations. Companies that actively engage in policy advocacy and adapt promptly to legal changes maintain competitive advantage.

References

• CVS (2023). Health History. CVS.com.
• CVS (2023). Health Pharmacy and Health Services. CVS.com.
• Finachill (2023). CVS Stock Vs Walgreens: Which Is Best?
• Macrotrends (2022). CVS Health Revenue | CVS. Revenue and Profit.
• Macrotrends (2022). CVS Health Cash Flow Statement | CVS. Financial / Cash flow Statement.
• Robinhood (2023). CVS Stock.
• Robinhood (2023). Walgreens Stock.
• U.S Securities and Exchange Commission (n.d). Financial Navigating in the Current Economy: Ten Things to Consider Before You Make Investing Decisions. Sec.gov.
• Walgreens Boots Alliance. A Global Pharmacy-Led Health and Wellbeing Company. Walgreens Boots Alliance History.
• Hargrave, M. (2022). Financial Ratios and Analysis. Investment Journal.