Prescribing A Pharmacy Trade: Walgreens Vs. CVS Vs. Fred's

Loop Capital analyst Andrew Wolf recently took an in-depth look at drug store stocks Walgreens Boots Alliance Inc WBA, CVS Health Corp CVS and Fred’s, Inc. FRED and found there is just one stock worth buying in the group.

Fred's

Loop initiated coverage of Fred’s at Hold with a $6.00 price target. Fred’s is coming off a disappointing 2016, and Wolf says the company has failed to demonstrate that 2017 will be much better.

Fred’s has yet to deliver reliable earnings visibility as its turnaround story has been slow to develop. In the past 18 months, Fred’s has added new management, upgraded pharmacy technology, remodeled 44 stores and taken other steps to improve its supply chain management and update its technology. While Wolf expects these initiatives to improve profitability in the second half of 2017, the turnaround efforts have taken longer than the company originally anticipated.

CVS

Loop also initiated coverage of CVS with a Hold rating and $83 price target. Wolf says 2017 was a difficult year for CVS and will likely end up being the first year of declining profits for CVS’s retail business in more than 10 years. In addition, CVS has lost prescription market share to Walgreens and its playbook to return to profitability by focusing on its front-end sales and healthcare marketing is still in its early stages.

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Walgreens

While Wolf doesn’t recommend buying Fred’s or CVS, Loop has initiated coverage of Walgreen’s with a Buy rating and $95 price target. Walgreens is undergoing a transition year in 2017 after the FTC blocked its potential merger with Rite Aid Corporation RAD. However, Wolf says a new series of partnerships and strategic alliances have Walgreen’s positioned to reaccelerate its growth in 2018.

“Going forward, we believe Walgreens’ pharmacy business strategy has been transformed to a high-productivity driven profit model predicated on increasing efficiencies inherent to the ‘productivity loop,’” Wolf wrote.

Despite a broad market rally, the stocks of Walgreens, Fred’s, CVS and Rite Aid are all down year to date.