hi I'm Jimmy in this video I'm gonnawalk through my analysis of the Walgreens boots Alliance ticker symbolWBA and CVS health ticker symbol CVS this is the 30th video in our series whoare analyzing all 30 stocks in the Dow Jones Industrial Average technicallythis video is supposed to be just for Walgreens but there's a lot of thingsgoing on the industry so I thought it made sense to compare Walgreens stock toCVS stock this is the final company analysis video in this series up next inthe series we're going to build the three different portfolios that we'vebeen after a dividend portfolio on value portfolio and a growth portalyou could see a link in the description below to all the other videos in theseries right now there's 29 you found us a later date you might have all of thoseand hopefully the portfolios okay so both CVS and Walgreens operate retailpharmacies Walgreens has about 14,000 locations in the US and internationallyand CVS has just short of 10,000 locations now one of the reasons thatWalgreens has more locations than CVS is that Walgreens recently closed its dealwith writing to purchase just short of 2000 stores this helps give Walgreens abit of an edge as far as store locations this also speaks to the fundamentallydifferent approaches of the two businesses path so while Walgreens wasoff buying Rite Aid stores while CVS was diversifying a bit away from stores andthey bought Aetna and this difference has changed a real lot about theirbusinesses so this is a chart of revenue for both Walgreens and CVS and now Ikept them separate because I don't think that they should be compared toside-by-side because technically Walgreens year ends at as of August 31stand cvs's ends on December 31st so I didn't want to put them side-by-side tomake it look like we should compare one to the other it's really the generaltrend of the two that I'm after now I have the charts scaled the same way sowe can see from a numerical basis how the number how the two companies compareto each other but that may not do Walgreens much justice because when werescale these charts based on their own numbers well we can see that Walgreenshas had a better growth rate as far as revenue is concerned than cbss Walgreensgrowth has grown at a compounded annual growth rate of thepast five years at almost 13 percent while CVS has put up about nine percentbut as you may notice analyst estimates those are the green bars well they seemto be telling a story that they expect for CVS to grow at a faster rate thanWalgreens going forward so let's look for a moment at what's happening withthe two companies and with the industry in general and then we'll try to come upwith a fair value for this for both Walgreens stock and CVS is stock solet's start with Walgreens so Walgreens has been one of the largest place in theu.

S.

prescription drug market for many years then a few years ago in back in2014 Walgreens goes out and buys Allianceboots boots is the British pharmacy store and overnight Walgreenshas an international exposure well a few years later Walgreens continues theirpush to expand their stores and they go out and they try to acquire Rite Aidanother pharmacy they end up losing a bid for the whole business but as Imentioned before they were able to buy just short of 2000 stores now thisbrings us to a potential issue so the industry in general is facing a fewheadwinds primarily revolving around the pricing of drugs now in the UnitedStates which is where most of CVS's and Walgreens is revenue comes from whiledrugs have been known drug prices have been notoriously high now for a longtime they've gotten away with it because insurance companies paid a large portionof those drug costs this allowed for drug companies and pharmacies to taketheir profits but lately pharmacy the tire pharmaceutical industry has beenfeeling a ton of pressure especially in the United States health insurancecompanies have begun to offer more and more high deductible insurance plans andessentially this makes filling prescription drugs more expensive forthe average consumer at least more expensive than it was just a few yearsago so more than ever before pharmacies like CVS and Walgreens where they'restarting to be forced to compete on price and not just let's say the breadthof their offerings well now this brings us over to something called pharmacybenefit management and basically this is one a representative of a company or agroup deal with a group like CVS or Walgreens essentially what they say ishey I represent this or this company whatever it might be and wewant to get a group rate on medicines from your pharmacy again this lowers themargins for either a Walgreens or CVS but in this scenario the PharmacyBenefit manager is likely to only cut that deal with either a Walgreens or CVSthey're likely not to cut it with multiple places so in that case thepharmacy will take a haircut on margins but they get to lock up volume for theirbusiness and that seems to be a good thing it seems to be something that'swhere it's all heading and there would they seem to be willing to accept it soit turns out that one of the issues that Walgreens is running into is that theirmargins of being forced lower and they have limited leverage to negotiate withthese pharmacy benefit managers so as I mentioned in the beginning of the videoCVS on the other hand will they went out and acquired Aetna and Aetna happens tobe one of the largest pharmacy benefit managers on the planetso clearly CVS has locked up that business and I personally think thatthis was a brilliant strategic decision relative to just expanding the number ofstores of behalf then there's even more headwinds coming down for the industryso back in 2018 Amazon bought pill pack which is essentially an online pharmacyso clearly that's going to be a headwind plus you have companies like WalmartGoogle Berkshire Hathaway Apple JPMorgan Chase they're all doing different thingsto take a swing at the industry so we're gonna have to see how all of thatdirectly competes with both CVS or Walgreens many of them are talking aboutfocusing on the insurance side of the business but either way we're gonna tosee how all that shakes up wherever they go they're going to have a lot ofpricing power now with all these industry problems in mind I think thatCVS is making more moves to become the dominant player in the industry but Idon't want to make it sound like Walgreens is just standing idly by theyhave deals with LabCorp Kroger they have a deal with they partnered up withBirchbox recently they also cut a deal with FedEx so you can now pick up ordrop off packages at Walgreens for FedEx so they're doing what they can tobalance out their own business so that's the overall industry backdrop andclearly the industry is taking some hits and both CVS's stock and Walgreens stockhave the lumps to prove it this is a chart ofWalgren stock over the past year and since the peak right here while thestock is down about 38 percent and I'm accounting for the fact that they paidout to different dividends during that time period walgreens has a dividendright now of about just short of 3% and I think this is a good thing to considerbecause that could be a good addition to the dividend portfolio when we switchover to CVS's stock chart well during the same time period from the peak torecently well their stock was down about 31 percent so not much better and theyalso have their dividends in there they have two dividends as well but theirdividend yield is a little bit better at about three and a half percent now thisdrop right here this drop was right around earnings time and they also gotsome analysts down rates and if we jump back to the Walgreens chart well we cansee right here this is when CVS announced their earnings and then thisdrop right here well this is when Walgreens announced their own earningsand I just wanted to point out how much investors tied these two stocks togetherokay so now let's go ahead and try to value them so we both we know that bothstocks have fallen but have they fallen enough to make them a good value let'sstart with CVS so this is a chart of CVS is free cash flow and the green bars areanalyst estimates I found those on Bloomberg and essentially I just took asestimates for free cash flow and now we're going to convert that to adiscounted cash flow calculation so we take our free cash flow projections fromup here we discount them by a weighted average cost of capital of 8.

5% but thenwe apply a perpetual growth rate of 2.

5% and this gives us our fair value of 156123 now technically this is the value of the whole company and this is a numberwe would use for both investors in bonds and investors in this stock nowgenerally this is where I would stop and we'll see a more in-depth look at how wedid all these calculations when we publish our discounted cash flow videoand we'll be publishing that one soon but for now if all we care about is thevalue of the stock then we can continue on but if you're interested in the valueof the firm well that's good for bond investors well you can mostly just stophere but for stock investors so what we should do is if we then take the valueof the firm today and we subtract long-term debt so in theory this givesus the value of the equity now we take CVS's equity value we dividethat by the shares outstanding and we get the fair value of the stock of about$64 per share okay it's simple enough now let's switch over to Walgreens stockand we'll then we'll wrap it up with some charts okay so with the exact sameconcept here in fact I use the exact same weighted average cost of capitaland the same perpetual growth rate I could probably make the case from mixingthese two up but for what we're doing here I think it makes sense to just tostick with the same ones so for Walgreens after running the numbers weget a fair value of about $69 per share for Walgreens stock now for bothWalgreens and CVS I kept cash out of this calculation now for Walgreens thatwouldn't have made much of a difference since they don't have much cash but CVSactually has a decent amount of cash so we would have added a bit to their valuebut technically I could have added cash much like we deducted debt nowrealistically we should have added cash up here since this would in theory beavailable to both the bondholders and the stockholders but I like to elect itto keep it off this calculation just to simplify the process of it and ifanything else it would simply make our calculations a bit more conservativeadding cash would have increased the value of both of their shares so stickwith what we have so this is a chart of Walgreens stock and right here well thisis a line for our calculated fair value now Walgreens is currently trading atabout fifty four dollars a share and we calculated the fair value to be about 69dollars a share so from $54 $69 about 28% upside ok looks pretty good perhapsthe market oversold Walgreens stock when we switch over to CVS is stock chartwell the current price of CVS is slightly over fifty four dollars a shareand we calculated our fair value to be about sixty four dollars a share sothat's about a 19% upside so once again perhaps the market oversoldCVS' stock so should we buy CVS stock or Walgren stockwell for me I can easily make the case that both of these belong the valueportfolio the fact that Walgreens stock is trading at a bigger discount to ourcalculated fair value makes sense when you compare it to the current tradingprice of CVS – they calculated fair value since I believethat CVS holds less risk than Walgreens does so in theory are going to be whatyou're going to want to be compensated for that greater risk by buying it at alarger margin of safety if you're curious about when to buy a stock weactually did a video on that and you could see a link in the descriptionbelow for that there we dive into how to apply a margin of safety to ourcalculated fair value so up next in our dial of 30 series is to build theseportfolios now I actually plan on going ahead andputting both CVS's stock and walgreens stock in the value portfolios andprobably the dividend portfolios as well since I both since I think that both CVSis dividend and Walgreens is dividend they're safe really what I'm likely todo is to combine these two companies into one position so let's pretend thatour average position size our average holding size is going to be 5 percent ofthe portfolio what I would likely do is take these two and make them both twoand a half percent that allows us to diversify a bit and I think it'll betterstrengthen our position as investors to take on the industry headwinds give thisa little bit of wiggle room and I like where they are broadly speaking as faras where they are right now trading relative to our calculated fair value sothat's my move what do you think what's your move what does your research showyou about these two companies let me know what you think in the commentsbelow and don't forget to stick around to hit subscribe because we're comingout with these portfolios and our valuation series is starting very soonand thank you for sticking with me all the way to in the video hit subscribehit thumbs up see in the next video thanks.