President Obama signed the health care reform bill into law Tuesday, and despite the huffing and puffing of Republicans, there’s not much that can be done to change things. The legislation gives 32 million currently uninsured Americans access to medical procedures and prescription drugs — making them prospective customers of leading prescription providers like CVS Caremark (CVS), Express Scripts (ESRX), Rite Aid (RAD), Medco Health Solutions (MHS), Walgreens (WAG) and Wal-Mart (WMT).
But don’t be fooled into thinking just because you get your prescriptions filled at a certain business that it’s going to see a bounce due to these reforms. Conventional pharmacy retailers still have to deal with the same overhead costs and crunch in non-prescription sales, so they will get less of a payday.
Retailers like CVS, Rite Aid, Walgreens and Wal-Mart are feeling the crunch of tighter consumer spending, and this will likely offset any gains due to health care reform. Here are some details:
CVS Caremark (CVS) appears to be weathering the storm better than its competitors, but the real test will be if it post another strong earnings report on May 4 or whether its Q4 numbers were just a fluke.
Rite Aid (RAD) announced a few weeks back that it suffered a 3.2% drop in same-store sales in February, almost twice as bad a decline as forecast.
Just yesterday, Walgreens (WAG) announced it saw same-store sales dip 0.2% in the fourth-quarter, led by a 1.6% drop in “front of the store” items such as groceries and OTC remedies that don’t need a prescription.
Wal-Mart (WMT) said its fourth-quarter same-store sales fell 1.6% compared to a 2.4% increase for the same period a year ago. For the full year of 2009, Wal-Mart saw same-store sales essentially flat compared to a 2.8% increase in 2008.
Contrast the troubles of these retailers with benefits managers Express Scripts and Medco Health.
Express Scripts (ESRX) has enjoyed a 3.8% average annual sales boost over the last five years, reporting $24.7 billion in sales in 2009. Its stock is up 120% in the last year, and has topped earnings forecasts in each of the last four quarters. That’s growth you can take to the bank no matter what changes health care reform brings.
Medco Health Solutions (MHS) operates the nation’s largest mail order pharmacy, and sales are up at an 11.1% average annual rate over the past five-years. Though pricey with a P/E of about 25, the company has been proving its worth by raising its earnings per share in each of the last four consecutive quarters — without health care reform to sway the numbers.
If you’re looking for a great way to play healthcare reform, stick with pharmacy benefits managers. Typical pharmacy retailers may be the first that pop into your mind because that’s where you do your shopping, but as an investor you would be better served steering clear of Walgreens and Walmart.
