Group Project: CVS and Walgreens
FINC 331 6380 Finance for the Nonfinancial Manager
Group Term Paper
- Provide a short background on each company, the industry and the market (growing, declining, etc?) in which they operate.
CVS and Walgreens are two of the largest and most well-established players in the retail, pharmaceutical industry in the United States. With a strong focus on customer service, convenience, and innovation, both companies are well-positioned to succeed in an increasingly competitive market.
CVS Health Corporation was founded in 1963 as a Consumer Value store and is headquartered in Woonsocket, Rhode Island. It operates over 9,000 retail locations across the United States, including its flagship CVS Pharmacy stores. In addition to traditional pharmacy services, CVS also offers a range of health-related products and services, including health clinics, diabetes management, and home health-care services (CVS Health History). The company also operates a large pharmacy benefits management (PBM) business, which manages prescription drug plans for employers and government health plans. On the other hand, Walgreens Boots Alliance was designed in 2014 through the merger of Walgreens and Alliance Boots, a European pharmacy chain (Walgreens Boots Alliance). The company is headquartered in Deerfield, Illinois, and operates over 9,000 retail locations in the United States, including its flagship Walgreens stores. In addition to traditional pharmacy services, Walgreens also offers a range of health and wellness products, including vitamins, supplements, and personal care products (Walgreens Boots Alliance History). The company also operates a large wholesale business, supplying drugs and other health-related products to other retailers and health-care providers.
The retail, pharmaceutical industry is highly regulated, with strict laws and regulations governing the distribution of prescription drugs. As a result, the industry is dominated by a small number of large players, including CVS and Walgreens. Competition in the industry is intense, with companies competing on factors such as price, convenience, and customer service. The usage of generic medications, which are frequently less expensive than brand-name medications, as well as the rising popularity of mail-order and online pharmacies have both had an influence on the industry in recent years (CVS Health Pharmacy and Health Services). The market for retail pharmaceutical services in the United States is large and growing, with spending on prescription drugs reaching over $450 billion in 2020. Despite this growth, the industry remains highly competitive, with companies such as CVS and Walgreens facing increasing pressure from online and mail-order pharmacies, as well as from new entrants, such as grocery store chains, which are entering the market with their own in-store pharmacies. In order to remain competitive, companies in the retail and pharmaceutical industry must continue to innovate and offer new and improved products and services while also controlling costs and maximizing profits.
- Using the current ratio and debt ratios, discuss what conclusions you can make about each company’s ability to pay current liabilities (debt). Support your conclusions. Which company is doing better, why or why not?
Walgreens’ current ratio as of November 30, 2022: 0.70 (Macrotrends, 2022).
CVS’ current ratio as of September 30, 2022: 0.94 (Macrotrends, 2022)
Debt Ratio = Total Debt/Total Assets
Walgreens debt ratio: $10,615,000,000/$90,124,000,000 = 12%
CVS debt ratio: $63,800,000,000/$231,212,000,000 = 27.5%
Both companies are at risk of not being able to pay off their current short-term financial obligations, though CVS is more financially stable than Walgreens. One major difference between the two companies is that CVS owns a Pharmacy Benefits Manager, or PBM, whereas Walgreens must pay a PBM. Owning a PBM essentially cuts out middleman costs that other pharmacies must pay to negotiate patient-drug benefits (Hanzard, S. 2022).
Both companies also have a high debt ratio, though Walgreens’ debt ratio is more favorable that CVS’.
- Using the profitability and operating performance ratios, discuss what conclusions you can make about each company’s profits over the past three years. Support your conclusions. Which company is doing better, why or why not?
CVS Company
Profitability indicator ratios: ·
Return on Equity
Net Income/Average Shareholders
Average Shareholders= (Opening Shareholder equity/ Closing Shareholder equity)/2
2022
(71011 + 75381)/2= 73196
17350/73196
0.24
2021
(75381+ 69701)/2 = 72541
7910/72541 =
0.11
2020
(69701 + 64170)/2 = 66936
7170/74761
0.11
Return on Assets
Net Income/ Total Assets
2022
17350/231212
0.08
2021
7910/232999
0.03
2020
7170/230715
0.03
Operating performance ratio: ·
Fixed asset turnover ratio
Net sales/ Average Fixed Ratio
Average Fixed Ratio = (Opening balance + Closing Balance)/2
2022
(162871+172991)/2 = 167931
315225/167931
1.90
2021
(172991+ 174436)/2 = 173669
292111/173669
1.7
2020
(174436 + 172147)/2 = 173292
268706/173292
1.6
Walgreens Company
Profitability indicator ratios: ·
Return on Equity
Net Income/Average Shareholders
Average Shareholders= (Opening Shareholder equity/ Closing Shareholder equity)/2
2022
(29366 + 23822)/2 = 26594
4337/26594
0.20
2021
(23822+ 21136)/2 = 22479
2542/ 22479
0.11
2020
(21136 + 23776)/2 = 22456
456/22456
0.02
Return on Assets
Net Income/ Total Assets
2022
4337/90124
0.05
2021
2542/ 81285
0.03
2020
456/87174
0.01
Operating performance ratio:
Fixed asset turnover ratio
Net sales/ Average Fixed Ratio
Average Fixed Ratio = (Opening balance + Closing Balance)/2
2022
(90124 + 81285)/2 = 85705
132703/85705
1.55
2021
(81285 + 87174)/ 2 =84230
132509/84230
1.60
2020
(87174 + 112420)/2 = 99797
121982/ 99797
1.22
Conclusion
CVS Company
The computations above show the financial statement analysis of the two companies, CVS and Walgreen, respectively, based on profitability indicators and operating performance ratios. To begin with CVS profitability indicators, the return on equity has improved over the three years from 0.11 in 2020 to 0.24 in 2022. According to the documentation (Fernando, 2022, p. 2), the higher the increase in the return on equity, the higher the capacity of the Company to convert equity into profits. The computations, therefore, indicate that the capacity of the Company to convert equity into profits has increased over time. A return on equity from about 15 up to about 29% is considered desirable, and therefore the Company’s return on equity of 0.25 which is equivalent to 24%, is considered good. The return on assets on the Company is also increasing, which shows that the effectiveness of the Company in converting the assets invested to profits has increased over time, giving a positive impression (Hargrave, 2022, p. 2). This generally indicates that the Company has high asset efficiency. Finally, the Company has indicated an increasing fixed turnover ratio. This is important as it indicates that the Company has generally increased its efficiency in generating sales from the existing fixed assets (Kenton, 2023, p. 2). A general impressing is that the management is effectively using its fixed assets
Walgreens Company
From the computations of the profitability ratios of Walgreens Company, there is a general increase over the three years. The return on equity has increased from 0.02 in 2020 to 0.20 in 2022. This indicates a general increase in the Company’s efficiency in generating profits from its equity hence an improvement in profitability (Fernando, 2022, p. 2). The return on assets ratio of the Company has increased from 0.01 in 2020 to 0.05 in 2022, which shows an increase in the effectiveness of the Company in converting its assets into profits. The increase shows the ability to realize profits from small investments, improving asset efficiency over the years (Hargrave, 2022, p. 2). Finally, the operating performance ratio of Walgreens Company increased to 1.60 in 2021 from 1.22 in 2020 and then decreased to 1.55 in 2022. This shows that the Company’s efficiency in turning sales from the existing fixed assets could be more stable despite the improvement from the base year (Kenton, 2023, p. 2). The management needs to increase its efficiency and effectiveness in using the assets.
The Company that is doing better
From the above analysis, CVS Company is doing better than Walgreens Company. This is because, based on profitability indicators, CVS has higher ratios than Walgreens, indicating that its rate of making profits is higher than CVS. Also, based on operating performance indicators, the fixed assets turnover ratio of CVS is consistently increasing, which indicates stability. In contrast, Walgreen has indicated an increase and decrease, which indicates a lack of stability and hence more need for efficient management of resources.
- Using the cash flow indicator and investment valuation ratios, discuss which company is more likely to have satisfied stockholders. Support your conclusions. Which company is doing better, why or why not?
After analyzing the stock market and shares from Robinhood: Investing for all. Going back 5 years to the date of March 2, 2018 the average CVS stock sold at $67.46 per share. Just as any stock performs it fluctuates up and down depending on a range of scenarios. As of January 31, 2023 according to Robinhood Investing it sits at $88.21 per share (Robinhood, 2023). Over the past 5 years CVS has had an average growth of 13.17% in total for year-over-year. In the year of 2019 compared to 2018 CVS had an 31.96% increase compared to the year of 2018. In the year of 2019 the company gained another 4.65% increase on top of the staggering year previously obtained. Even throughout the pandemic CVS climbed yet again with an 8.71% increase. As of September 30, 2022 revenue reported showed an 9.98% increase year-over-year (Macrotrends, 2022). Looking specifically at the cash flow from operating CVS in the last 6 years to the year of 2021 stands at $73,991. See Appendix A: Cash Flow for Operating Expenses to see the past 9 years annual report prepared by Macrotrends annual reports.
Specifically looking at Walgreens on the date of March 2, 2018 the average share sold for $70.58 per share. As of today January 31, 2023 it now sits at $36.86 per share (Robinhood, 2023). They have had both increases and decreases in profits over the years. Comparing the year of 2019 to 2020 they had an 1.59% increase and The highest increase was in the year of 2021 with an 8.63% increase. For 2022 there was an 0.15% increase and since then there has been a total decline of 3.6% decrease (Macrotrends, 2022). Over the past 6 years Walgreens
operating cash flow equates to $36,050. See Appendix B: Cash Flow Walgreens to overview the annual reports for the past 9 years of operating cash flow statements (Macrotrends, 2022).
After analyzing these statements and conducting further review the most satisfied shareholders will be CVS stock holders. During the pandemic both companies had struggles but at the end of it CVS capitalized through the vaccine distribution. Walgreens has been on a decline for years and investing into CVS is a long-term investment but also a safe one. CVS has been on a steady increase in profits and continues to grow compared to its competitor Walgreens (Finachill, 2023).
Having the opportunity to conduct a phone interview with an accountant by the Name of Jonathan Hieman this accountant mentions that PE ratio values its earning price to its current share price relative to its earnings per share. Over a phone interview he mentioned that Walgreens PE ratio is -10.5. Typically most investors look for a range 10-30 if not a higher PE ratio. Currently CVS PE ratio is 35.97. This being analyzed CVS is doing much better based on the price action. The price per share has increased tremendously compared to Walgreens (Heiman, 2023). See Appendix B: Phone Interview
- As an investor, discuss which company you would choose to invest in and provide a rationale for your decision. Support your conclusions, why or why not?
Professional Opinion 1:
Based on all the analysis of CVS and Walgreens I would currently choose to invest with CVS due to how successful they have been in the coming years. This being said, Walgreens is low in many categories meaning rewards could be high if they were to ever change direction from a business point of view. Having first hand experience in buying stocks low can have its own risks and rewards as well. So still with this in mind and where life is currently for myself as an investor I would have to go with the safe option of choosing CVS over walgreens. Also to add since checking the stock market Walgreens has dropped 0.34 cents per share since January 31st 2023 now sitting at 36.52 on February 15, 2023. Although buying low can have its perks I still think as an investor Walgreens is just too unpredictable at this point to risk for a high reward / payout which is why I choose CVS.
Professional Opinion 2:
Professional Opinion 3:
Professional Opinion 4:
- After concluding your research about each company and reviewing their annual report, Discuss what non-financial criteria you would consider when choosing between these two investment options? Support your conclusions, why or why not?
Professional Opinion 1:
There are many areas that should be analyzed from non-financial criteria prior to investing. To give a list of things to consider is how the economy is performing, evaluation of your own comfort zone as to what you are willing to risk, are you financially able to obtain an emergency fund, and a major one is to consider your current debt. Prior to investing the fastest way to save money is to pay off any and all high interest credit debt / loans before investing. Before investing in anything it is a good start to analyze your current life situation or standpoint as well as other factors that can influence markets beyond your control. (U.S Securities and Exchange Commision, n.d).
Professional Opinion 2:
Professional Opinion 3:
Professional Opinion 4:
References:
CVS (2023). Health History. CVS.com. https://www.cvs.com/about/cvs-health-history
CVS (2023). Health Pharmacy and Health Services. CVS.com https://www.cvs.com/pharmacy-health-services
Finachill (2023). CVS Stock Vs Walgreens: Which Is Best? https://financhill.com/blog/investing/cvs-stock-vs-walgreens#:~:text=CVS%20is%20the%20bigger%20player%20and%20benefitted%20the,potential%20if%20you%20can%20weather%20the%20short-term%20storm.
Macrotrends (2022). CVS Health Revenue 2010-2022 | CVS. Revenue and Profit. https://www.macrotrends.net/stocks/charts/CVS/cvs-health/revenue
Macrotrends (2022). CVS Health Cash Flow Statement 2009-2021 | CVS. Financial / Cash flow Statement. https://www.macrotrends.net/stocks/charts/CVS/cvs-health/cash-flow-statement
Robinhood (2023). CVS Stock. https://robinhood.com/stocks/CVS/
Robinhood (2023). Walgreens Stock. https://robinhood.com/stocks/WBA/
U.S Securities and Exchange Commision (n.d).
Financial Navigating in the Current Economy: Ten Things to Consider Before You Make Investing Decisions. Sec.gov. https://www.sec.gov/investor/pubs/tenthingstoconsider.htm
Walgreens Boots Alliance. A Global Pharmacy-Led Health and Wellbeing Company. https://www.walgreensbootsalliance.com/
Walgreens Boots Alliance History. https://www.walgreensbootsalliance.com/our-company/history
