Health Care Reform Should Give These Four Pharmacy Stocks a Healthy Boost
Among the list of reforms, poor adults will gain access to Medicaid, small businesses that insure their employees will receive tax credits, those with pre-existing conditions will not be denied coverage and the Medicare "doughnut hole" that limited the amount of prescription drug coverage for seniors will finally be closed. But the law doesn't just benefit the elderly or the impoverished; several companies stand to cash in on the U.S.'s new policy, as well. In particular, pharmacies and pharmacy benefit managers who will be called upon to provide drugs and services to all of these newly insured Americans.Regardless of what the Waterloo (remember that in July 2009 Republicans claimed that defeating health care would be Obama's Waterloo) team thinks, the new health care law means more prescriptions. And more prescriptions are good for at least four companies: CVS Caremark (CVS), Express Scripts (ESRX), Medco Health Solutions (MHS) and Walgreens (WAG).
Here's a look at how these companies have fared over the past year and their potential growth as measured by the stock's PEG ratio, which is calculated by dividing the stock's price/earnings ratio by estimated annual earnings per share. If you're on the side of profiting from change -- and the health care bill is certainly that -- these investment ideas could be worth looking into.
CVS: The pharmacy's sales have clocked a 26.4% average annual growth rate over the past five years, with revenues for 2009 coming in at $98.7 billion. Net income over the past five years has climbed at an annual average rate of 32.6% to $3.7 billion last year. Its stock rose 32% in the last year and, on Monday, it traded at $35.25. CVS anticipates 10.7% earnings growth and it trades at a P/E of 13.7. Its PEG, is a moderately high 1.26. However, given the boost the company should see in increased prescriptions and refills from the health care law, the shares still look attractive.
Express Scripts: This pharmacy benefit management company has enjoyed a 3.8% average annual sales boost over the last five years, reporting $24.7 billion in sales in 2009. Its net income grew 24% a year during the same period to $827 million. Its stock is up 120% in the last year. On Monday, the shares climbed over $1.00 a share to $102. Even with that boost, Express Scripts's shares still have a reasonable 1.26 PEG ratio (on a P/E of 32.8 with 26.1% earnings growth.) Express Scripts isn't necessarily a bargain, but considering that the growth potential from health care reform hasn't really been built into the stock it still has some nice upside.
Medco Health: Medco operates the nation's largest mail order pharmacy. Its sales have climbed at an 11.1% average annual rate over the past five-years to $59.8 billion and its net income was up 21.6% a year during the same period to $1.3 billion. Its stock rose 71% in the last year to $66.06. At that level, Medco Health's stock is the priciest of my four picks, with a PEG ratio of 1.39 -- on a P/E of 25.3 with 18.2% earnings growth.
Walgreens: If you don't have a CVS in your town, then you probably have a Walgreens. The seemingly ubiquitous drugstore chain (which will be even more ubiquitous once it acquires New York-based chain Duane Reade) has seen sales increase at an 11.1% average annual clip over the past five years, logging $64.8 billion in sales last year. Net income over the past five years has grown at an 8.3% average annual rate, with $2.1 billion in profits last year. Its stock rose 45.5% in the last year to $35.70. With a PEG ratio of 0.92, Walgreens stock is the cheapest of my health care reform winners. Its P/E ratio is a mere 16.4, with 17.9% earnings growth.