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As Walgreens Stock Goes on Sale, Is CVS Now the Better Buy?

NEW YORK (TheStreet) -- Walgreens' (WAG) decision not to pursue a tax inversion in Switzerland after it buys the British chain Alliance Boots surprised the market and caused the stock to plunge over 12.6% in a day, to $60.42 as of 10:30 a.m.

At the same time arch-rival CVS Caremark (CVS - Get Report) announced earnings that disappointed some as its recent decision to stop selling cigarettes bit into profits. Pharmacy sales saved the company, however, and the stock was down only 0.21% to $77.10.

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While CVS and Walgreens may appear to be similar, in fact they are quite different -- and growing more so. CVS also owns Caremark, a pharmacy benefit manager, which handles drug sales and bookkeeping for large corporations. Walgreens doesn't have a PBM, but it's going to have a big European presence once the Alliance purchase is complete, and it already holds a 45% stake in the British company.

While both chains have said they want to emphasize clinics staffed by nurse practitioners to handle routine care, CVS has been more aggressive. It now has over 800 MinuteClinics in more than half the states, double the number of Walgreens Healthcare clinics.

The two also differ in how they fit the new model of care into existing stores. CVS is maintaining the look and feel of a convenience store with a pharmacy counter. Walgreens is spending about $1 million to remodel each of its stores under the name Well Experience. It has run into criticism for letting pharmacists come out from behind their counter in the new units

Alliance Boots will transform Walgreens' numbers even in absence of a headquarters change, because it has over 3,100 units along with its own private label products.

After the merger, the Walgreens and Alliance Boots chains together will have over 11,000 units, against 7,600 for CVS

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Combining the last reported yearly results, the Walgreens-Alliance merger would seem to create a company with $114 billion in annual sales -- larger than Costco (COST) or Kroger (KR) -- with profits of about $4.7 billion and nearly $7 billion in operating cash flow each year. (This is a back-of-the-envelope calculation, and real numbers will vary once the deal is in place.)

Compare that to CVS' $126 billion in revenue, $4.6 billion in earnings and $5.8 billion in free cash flow last year. The merged Walgreens-Alliance and CVS are pretty comparable.

On an earnings basis, this makes CVS a relative bargain. Investors are paying a price-to-earnings multiple of 19.6 for its earnings, against 23.5 for Walgreens before last night. The fall of Walgreens stock killed $9 billion in market cap, leaving it with a valuation of about $57 billion, and putting the two companies' P/E back into balance.

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