The demand for drugstore products is expected to grow in the coming years, thanks to the growing aging population, the rising frequency of chronic diseases, and increased healthcare expenditure by emerging economies.

The pharmaceutical industry is projected to surpass $1 trillion by 2023, partly due to thousands of compounds currently in the latter stages of clinical development, with several new drug approvals expected this year and beyond.

The industry’s growth prospects are also supported by the Supreme Court’s decision to maintain the Affordable Care Act (Obamacare), for which nearly 16 million Americans have already signed up.

Furthermore, the Consolidated Appropriations Act of 2023 is to allocate an additional $120.70 billion to the U.S. Department of Health and Human Services (HHS). On top of it, the global generic drugs market is expected to grow at a CAGR of 7.1% between 2023 and 2027.

Given the industry’s bright outlook, investing in fundamentally strong drugstore stock CVS Health Corporation (CVS) seems wise. However, given the financial weakness and bleak growth prospects, Rite Aid Corporation (RAD) might be best avoided now.

Stock to Buy:

CVS Health Corporation (CVS)

CVS offers healthcare services in the United States. Its segments include Pharmacy Services; Retail/LTC; Health Care Benefits; and Corporate/Other. The company offers health and wellness services, health plans, pharmacy services, and prescription drug coverage. It has more than 1,100 walk-in medical clinics and 9,000 retail locations.

On December 15, 2022, CVS’ board of directors approved a quarterly dividend of $0.605 per share on its Common Stock, indicating a 10% increase over the previous quarterly dividend. The dividend is payable to shareholders on February 1, 2023.

CVS pays a $2.42 per share dividend annually, which translates to a 2.71% yield on the current price level. Its four-year average dividend yield is 2.77%, and its dividend payments have grown at a CAGR of 3.2% over the past three years.

Also, on December 1, CVS announced that its first MinuteClinic sites had opened in northern Delaware. MinuteClinic, the medical clinics within certain CVS Pharmacy locations, should offer high-quality and convenient care for acute and chronic diseases, which should expand the company’s presence.

For the fiscal 2022 third quarter ended September 30, 2022, CVS’ total revenue increased 10% year-over-year to $81.16 billion, while its adjusted operating income grew 3.9% from the year-ago value to $4.23 billion. Moreover, the company’s adjusted EPS rose 6.1% from the prior year’s period to $2.09.

As of September 30, 2022, CVS’ cash and cash equivalents came in at $17.20 billion compared to $9.41 billion on December 31, 2021. The company’s total current assets stood at $68.34 billion compared to $60.01 billion as of December 31, 2021.

The consensus EPS estimate of $8.85 for the fiscal year ending December 2023 indicates a 2.5% year-over-year improvement. Likewise, the consensus revenue estimate of $325.52 billion for the same year reflects a rise of 3.4% year-over-year. Moreover, CVS surpassed consensus estimates in all four trailing quarters, which is impressive.

Shares of CVS have slumped 0.6% intraday to close the last trading session at $89.18.

CVS’ strong outlook is reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

The stock has an A grade for Growth and a B for Stability, Value, and Sentiment. It has topped among the four-stock B-rated Medical – Drug Stores industry.

Beyond what we stated above, we also have CVS’ ratings for Quality and Momentum. Get all CVS ratings here.

Stock to Avoid:

Rite Aid Corporation (RAD)

RAD operates a retail drugstore network in the United States. It operates through two segments, Retail Pharmacy, and Pharmacy Services. The company runs over 2,300 retail pharmacies in 17 states and sells brand and generic prescription medications. 

For the fiscal 2023 third quarter ended November 26, 2022, RAD’s revenue decreased 2.3% year-over-year to $6.08 billion, while its loss before income taxes widened 81.7% from the previous year’s quarter to $67.65 million.

Moreover, the company’s net loss and net loss per share worsened 86.2% and 83.6% from the year-ago values to $67.14 million and $1.23, respectively.

Analysts expect RAD’s revenue to decrease 11.9% year-over-year to $21.63 billion for the fiscal year ending February 2023. The company’s EPS for the same year is expected to worsen by 43.2% from the previous year to $2.16. The stock has slumped 48.6% over the past six months and 71.8% over the past year to close the last trading session at $3.54.

RAD’s POWR Ratings reflect its bleak prospects. The stock has an overall rating of D, equating to Sell in our proprietary rating system.

It has a Sentiment grade of F. Within the Medical – Drug Stores industry, RAD is ranked last among the four stocks.

To see additional POWR Ratings for Growth, Value, Momentum, Stability, and Quality for RAD, click here.

CVS shares were trading at $90.00 per share on Friday afternoon, up $0.82 (+0.92%). Year-to-date, CVS has declined -3.42%, versus a 4.24% rise in the benchmark S&P 500 index during the same period.

About the Author: Aanchal Sugandh

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns. More...

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