3 Retail Pharmacy and Drugstore Stocks to Watch Amid Industry Headwinds

Sadye Matula

The severity of the pandemic has weakened compared to the initial phase, courtesy of mass testing and vaccination drives, improved health support and development of herd immunity. Through the months of the pandemic, the pharmaceutical and drugstore industry witnessed a sea change in the nature of the business. From the […]

The severity of the pandemic has weakened compared to the initial phase, courtesy of mass testing and vaccination drives, improved health support and development of herd immunity. Through the months of the pandemic, the pharmaceutical and drugstore industry witnessed a sea change in the nature of the business. From the initial phase of making exponential profits from the mass panic-buying of all kinds of immunity-boosting drugs to the current responsibility of serving as COVID-19 testing and vaccination centers, the pharmaceutical and drugstore retailers have been playing a crucial role in terms of COVID-19 support.

Mail-order pharmacies too are registering growth on account of telehealth and remote monitoring services, creating unique opportunities for stalwarts within the industry like CVS Health CVS, Walgreens Boots Alliance WBA and Rite Aid RAD, which invested strategically in easy patient access to prescription and maintenance medications during this period. However, the majority of the retail drug store heavyweights have been southbound on the ongoing pharmacy reimbursement pressure. Further, with a decline in the severity of COVID-19, the demand for COVID-19 related health support has decreased, resulting in a significant drop in pandemic-led revenue generation for industry players.

Industry Description

The Zacks Retail – Pharmacies and Drug Stores industry includes retailing of a range of prescription and over-the-counter medications. The broad retail network of companies within the retail pharmacy industry delivers advanced health solutions to patients, customers and caregivers. Over the past few years, the scope of the retail pharmacy and drugstore market has expanded exponentially. In North America, some of these entities evolved to add wellness products and groceries to their traditional portfolio of prescription and over-the-counter medications. Going by a small business chronicle report, CVS Health and Rite Aid are among the “big three” in the drugstore space. However, non-healthcare leaders like Amazon, in 2018, acquired pharmacy delivery startup PillPack to enter the U.S. healthcare space.

4 Trends Shaping the Future of the Retail – Pharmacies and Drug Stores Industry

Industry Trend Remains Dismal Amid Reimbursement Pressure: Brand-name drugs, which hold wide profit margins, are protected with a reliable supply chain. However, the low-margin generic drugs, which have a fragile supply chain network, have been bearing the brunt of the pandemic-induced economic slump. Drug retailers are also witnessing a constant rise in medicine prices, stemming from the rising cost of raw materials of drugs. The industry players are currently grappling with continued pressure from non-reimbursable pharmacy expenses, which are significantly pulling down the mass demand for prescription as well as over-the-counter drugs, and vaccinations. It has been widely observed that patients are replacing prescription medicines with low-cost generic drugs.

Threat of Amazon Entering Brick-And-Mortar: A Business Insider report on May 26, 2021 came up with the speculation that there have been discussions about Amazon setting up stand-alone stores in a few locations, including Boston and Phoenix. Further, per the report, which cites insider sources, Amazon is exploring plans of placing the pharmacies inside Amazon-owned Whole Foods locations. Earlier, following its entry, the e-commerce giant grabbed a significant chunk of the online pharmacy market from the legacy retail drug store space. Needless to say, this latest speculation has come as a major blow to the industry, putting the retail pharmacy and drugstore stocks in a tighter spot.

Major Role in COVID Support Drives Growth: A number of retail pharmacy players are currently playing a pivotal role in administering COVID-19 vaccination shots. The center has launched Federal-Retail Pharmacy Program for COVID-19 vaccination to increase access to vaccines across the United States. This line of opportunity is contributing significantly to these industry players’ top line. Although, at present, the retail pharmacy players are registering a decline in COVID-support-related revenues, the looming fourth wave of the new virus variant might again turn the table in favor of them.

Online Pharmacy and Mail Order Boom: The widespread shelter-in-place regulations since the beginning of the pandemic have created a significant shift in demand toward mail order and online pharmacy. Experts say that this transition is expected to last even after the pandemic is over. Data claims that COVID-19 has only accelerated the already-growing demand for e-pharmacy and mail-ordered home delivery systems. Going by a Patch report, “Two years ago, 11% of U.S. adult pharmacy customers got their prescription from an online pharmacy, based on a survey conducted by market research firm CivicScience, [.] That figure has been steadily rising over the years, according to Statista.com, an online statistics portal.” With Amazon’s big move into the healthcare space, the retail pharmacy industry entered a new phase of fierce competition. To counter this rivalry, the companies are strategically attempting to gain in size and scale.
 

Zacks Industry Rank Indicates Dull Near-Term Prospects

The industry’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. The Zacks Retail – Pharmacies and Drug Stores industry, housed within the broader Zacks Retail and Wholesale sector, currently carries a Zacks Industry Rank #201, placing it in the bottom 20% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

We will present a few stocks that have the potential to outperform the market based on a strong earnings outlook. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Outperforms S&P 500 & Sector

The Zacks Retail – Pharmacies and Drug Stores industry has outperformed the Zacks S&P 500 composite as well as its own sector over the past year. The stocks in this industry have collectively gained 25.1% over this period while the Retail-Wholesale Sector has declined 16.6%. The Zacks S&P 500 composite has increased 13.4% over the said time frame.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing medical stocks, the industry is currently trading at 11.51X compared with the S&P 500’s 19.69X and the sector’s 23.67X.

Over the last five years, the sector has traded as high as 14.95X, as low as 7.42X, and at the median of 9.98X, as the charts below show.

Price-to-Earnings Forward Twelve Months (F12M)

Price-to-Earnings Forward Twelve Months (F12M)

3 Retail – Pharmacies and Drug Stores Stocks in Focus

CVS Health: CVS Health is currently seeing greater engagement in an expanded set of digital health services such as antibody and PCR testing, vaccinations and omni-channel pharmacy. According to the company’s fourth-quarter update, CVS.com is one of the top health websites with more than 2 billion visits in 2021, up nearly 55% over the prior year. In CVS Health Retail, amid the pandemic, this segment played a crucial role as part of the company’s community-focused strategy. Within pharmacy services, growth outperformed CVS Health’s expectations.

The Zacks Consensus Estimate for 2022 revenues indicates a year-over-year rise of 5.2%. CVS Health, a Zacks Rank #3 (Hold) stock, has risen 46% in the past year.

Price and Consensus: CVS

Walgreens Boots: Walgreens Boots continues to make progress in transforming the pharmacy business and the method of delivering healthcare, both through physical stores and digital channels. As part of the iA pharmacy automation efforts, two micro-fulfillment centers are operating in Phoenix and Dallas. These currently support approximately 800 Walgreens locations and the company is on track for nine operational markets by the end of fiscal 2022. Walgreens recently launched Walgreens Health — a new segment that will focus on bringing together the company’s healthcare ambitions and powering up the new and existing assets to support the journey.

The Zacks Consensus Estimate for fiscal 2022 revenues indicates a year-over-year decline of 3.6%. Walgreens Boots, a Zacks Rank #3 stock, has lost 1.4% in the past six months.

Price and Consensus: WBA

Rite Aid: Continued strength in its underlying business, accelerated COVID-19 vaccine program, solid performance at Elixir, and enhanced retail and digital experiences are driving Rite Aid’s revenues in the recent quarters. The company remains committed to providing lower healthcare costs, better customer engagement and personalized services.

The Zacks Consensus Estimate for fiscal 2022 (ending February 2022) revenues of Rite Aid indicates an increase of 1.6% over fiscal 2021. Rite Aid, a Zacks Rank #3 stock, has plunged 38.7% in the past six months.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: RAD

 

 

 

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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