If sales of Walgreen in Prescriptions filled segment will continue to rally this will also suggest revenues of Express Scripts will rise.
Moreover, if these companies’ revenues will increase, this could impede the growth of revenues of CVS in the coming months.
Walgreen wasn’t the only company with a drop in revenues, Rite Aid Corporation (NYSE:RAD) has also had a decline in revenues: in its latest quarterly report, the revenues of the company fell by 1.2%. The company’s profit margin is the lowest of the three drugstore companies at 1%.
The sharp rise in revenues of CVS led to a rise in the company’s free cash flow as it grew from $3.44 billion in 2011 to $4.82 billion in 2012. The company is putting its funds to use and continues to buyback its stock: in 2012 the company purchased nearly $3.5 billion worth of stocks. This direction is likely to keep the stock price from falling.
Rite Aid also has a positive free cash flow of $354 million despite its low profit margins.
Walgreen’s cash flow situation is much worse with a negative free cash flow of $(1.4) billion in the fiscal year of 2012. The company is buying back its stocks – in 2012 it bought $1.2 billion worth of shares – but it also raises debt. In 2012 the company took loans of $3 billion. Since the interest rates are very low, and since the company is paying a dividend yield of 2.66%, which is higher than the interest rate the company will pay for a loan, then this decision of switching stocks for debt seems reasonable. But this process will raise the company’s debt to equity ratio, which is currently at 0.35. This could raise the financial risk of Walgreen.
The current financial situation of Walgreen could be better. The company’s negative free cash flow, decline in revenues and increase in debt makes this company less attractive as an investment compared to CVS. In recent quarters, CVS benefited from the fallout between Walgreen’s and Express Scripts. But the resolved dispute might slowly bring back customers to Walgreen’s, which will raise its revenues and thus impede the growth of CVS.
For further Reading:
Will Exxon Continue To Trade Up?
The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.
The article Will These Drugstores Change Course in 2013? originally appeared on Fool.com and is written by Lior Cohen.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
