CVS Vs. Walgreen

CVS Caremark and Walgreen were the latest companies Cramer put through the rigor of his 10-point rating scale.

This process of valuing stocks is the same one used by money managers on Wall Street (though the scale is solely Cramer’s alone). These guys look at sector and growth and dividends to see which company is the best to own. This week Cramer added another category to the mix – key metrics. These are the sector-specific measurements that show which company’s better at its business. For CVS and Walgreen , retail outlets, we want to look at same-store sales growth and strategies for future growth.

First, though, we always start with a look at the sector that these stocks operate in. CVS and Walgreen are great picks for tough economic times such as these. They sell consumer goods like toothpaste, shampoo and medications as well. No matter how bad things get, people don’t stop buying these items. And that’s why Wall Street rotates into names like CVS and WAG when the market turns down. So out of possible five points – half of Cramer’s 10-point scale because a sector accounts for 50% of a stock’s value – give both these guys four points. Score: 4-4, tie.

Now let’s get to growth. Walgreen outperformed here because last quarter’s same-store sales growth was both better than CVS and better balanced between front-of-the-store items and the pharmacy. Plus, CVS no longer offers Wall Street monthly same-store reports, going instead with quarterly numbers. That lack of frequency, and uneven distribution in growth, has Cramer worried. Give Walgreen another point. Score: 5-4, WAG.

Walgreen wins when we compared growth strategies, too. While Cramer once praised CVS for buying Caremark, a pharmacy benefits manager, as a way to reduce its drug costs. But the acquisition hasn’t worked out as hoped. CVS’s PBM grew only 1% at last report, while rival Medco, a similar company, grew 16%. Then to make things worse, CVS went and bought Longs Drugs, a PBM out West, to expand its footprint. Now the company’s expecting the deal to hurt earnings for two years.

Walgreen, though, has shown Wall Street that it’s not throwing stores up necessarily. And even better, the company is focusing on making the stores it already has even better. WAG announced it cut its long-term store growth target to 5% by 2011 from 8% by 2009. Granted, CVS reported an inline quarter while WAG missed by a penny, but CVS has become a bit too wieldy for Cramer right now. He’s rather you own the sleek, strategy-focused Walgreen. Give two points to WAG and one to CVS. Final score: 7-5, WAG.

The market seems to agree with Cramer’s evaluation. CVS trades at 12.7 times earnings and WAG at 14.5, which makes sense because Walgreen is the better company.

Cramer’s call? WAG’s a buy, but not until it pulls back to $34 from its present level of $35.28.

Jim's charitable trust owns Walgreen.

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