Valuation of CVS vs Walgreen - Essay Example

The paper "Valuation of CVS vs Walgreen" is an outstanding example of an essay on finance and accounting. Walgreens (WAG) and CVS are two companies retailing in pharmacy circles.  The companies are commonly known as 2 eight hundred pound gorillas. The companies run more than seven hundred branches with WAG owning 7600 stores. The prescription of Walgreen accounts for more than 65 percent of the industry’s revenue and both firms face increased competition from other stores like Wal-Mart.  WAG and CVS are best defined by the difference. WAG focusses on the retail pharmacy while CVS focusses on the pharmacy benefits management. Walgreen cemented its position as the country’s largest pharmacy through the sale of PBM to CHS for 525 million dollars. WAG has planned to boost the dividend by 29% and buy 2 Billion dollars in stock. Walgreen has a market capitalization of 38.74 Billion Dollars and pays 1.6 percent as a dividend yield. At 42.79 dollars, the company trades at 63 percent above the 52week of 26.77 dollars. WAG has a P/E growth ratio of 1.17, meaning the stock is highly valued. The company’s total cash is 2.65 Billion dollars, which is higher than 2.40 Billion dollars as its total debt.  Conversely, CVS is the country’s service provider of pharmacy, having entered into PBM space in a larger way with the purchase of Caremark worth 26.9 Billion dollars. The company handles more than 50 million clients. CVS has a market capitalization of 50.50 Billion dollars and pays 1.3 percent as a dividend yield. At a price of 37.30 dollars, the company trades above 39 percent above the 52 week low of 26.84 dollars. PEG of the CVS is 1.25m meaning that the company is valued fairly. CVS incurs a debt of 9.78 Billion dollars in debt against the 2.17 Billion dollars in cash. Walgreens and CVS face the rising competition from the discount branches.

            Walgreen has a higher gross margin, which is highly offset by greater SG&A expenditure as net revenue’s percentage. As a result, Walgreen recorded an EBIT margin of 5.7 in 2013, which is higher than that of CV’s 5.5 percent. Although the Earnings can be compared, Walgreen differentiates itself with a margin of 3.8 % vs. 3.3 % recorded by CV. This is because; Walgreen has no interest expense without an on-balance sheet interest income and financing. The small difference is important as the difference is related to a highly leveraged position of CVS.

On a comparable basis in terms of revenues, Walgreen generated net revenue if 52.3Billion dollars compared to CVS’s net income of 50.2 Billion dollars. Although the Compound Annual Growth Rate of CV over the last five years was 12 percent, slightly greater 11 percent. The two giants have embraced different strategies in achieving tremendous growth. Walgreen has grown organically through the opening of stores, while CVS has embraced strategies of acquiring competitors. Despite having the same-store operations, this crucial difference has resulted in a variance in comparing their operating performance.