WAG Ready to Outrun CVS Health with Jana Partners

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In the race between pharmacy chains CVS Health (CVS) and Walgreen (WAG), WAG had the upper hand for much of 2014. However, that changed last month when investors became disenchanted with Walgreen for a couple of reasons, not the least of which had to do with the retailer’s decision to remain headquartered in Deerfield, Ill. despite acquiring the U.K.’s Alliance Boots. Shares tumbled 18% in a couple of days.

cvs health, walgreen stockMeanwhile, CVS capitalized on the opportunity, staying the course with its socially responsible reimaging plan by dropping cigarettes from its store shelves ahead of schedule and changing its name to reflect its healthcare initiatives. The moves paid off, with CVS stock outpacing WAG in the interim.

But thanks to activist hedge fund investor Barry Rosenstein of Jana Partners, who just found a seat on Walgreen’s board of directors, the advantage may have just shifted back to WAG. Rosenstein has a history of creating value for shareholders, and now he’s closer to ever than getting what he wants from WAG.

If he can work his magic once again, WAG could have the upper hand over CVS.

Rosenstein Rocks the Boat

Rosenstein owns 12.5 million WAG shares, or a little more than a 1% stake. Now that he’s got a seat on the board, and the potential to add up to two more members, Rosenstein is laying it on the line despite Walgreen management’s own attempt to create shareholders value.

Apparently, Rosenstein doesn’t have much faith in WAG management, including Greg Wasson, who will remain at the helm of the newly combined company.

You can’t really blame Rosenstein. He supported a tax-inversion deal with Alliance Boots as it would have freed up more capital for the retailer as a consequence of a smaller tax bill. In a one-two punch to investors, Walgreen proceeded to dismiss the tax inversion and issue financial guidance that missed the mark.

WAG Estimates Consensus Estimates
Adjusted EPS $4.25 – $4.60  $5.04
Revenue  $126B – $130B  $127B

Walgreen recently announced plans for a $3 billion share-buyback program to unfold through 2016, but Rosenstein reportedly was looking for more. In addition, Rosenstein has been urging Walgreen to cut costs more aggressively, and now he’ll have a hand in the company’s plan to achieve $1 billion in cost savings by year-end fiscal 2017.

CVS Shines

Unlike the retail sector more broadly, where many names are down and out, not all pharmacy chains are struggling. CVS Health recently improved its full-year 2014 profit and cash flow guidance, adding salt to the wounds of WAG investors.

Revised Guidance Prior Guidance
Adjusted EPS $4.43 – $4.51 $4.36 – $4.50
Operational Free Cash Flow $7.2B – $7.5B $7B – $7.3B

Clearly CVS’ decision to transform into more of a healthcare company has paid off. With the reimaging, CVS just broadened its appeal to attract socially responsible investors in addition to those who are in it for the steady returns and modest 1.4% dividend yield. In terms of shareholder value, CVS is a little more than half way through its plan to return $5 billion or more to investors in dividends and share buybacks this year.

However, by transforming itself into a healthcare play, the company is positioning itself smack dab in the middle of the Affordable Care Act, whose implementation has been unsteady. That could potentially cause CVS stock to stumble.

Rosenstein Effect

And for all of CVS’ strategic moves, WAG has something that CVS doesn’t: Rosenstein. The hedge fund manager boasted an aggregated annualized return of 33.3% in 2013, according to Activist Insight. His fund has been part of successful activist campaigns ranging from grocery chain Safeway (SWY), which was acquired by private equity firm Cerberus Capital Management, to Oil States International (OIS) and the spinoff of its accommodations division.

With about a half a dozen activist campaigns under way, Rosenstein targets undervalued companies that have lagged their peer groups over the long term.

Conclusion

WAG is looking better with Rosenstein’ influence than it would without it. Meanwhile, with CVS Health, you know what you’re getting: a stock that’s resembling more of a socially responsible investment every day and one that shows no signs of reneging on its promises.

And while Walgreen disappointed investors with its decision to remain domiciled on this side of the pond, there’s more value to be had. With Rosenstein in the picture, there’s a good chance that the value can be unlocked. For that reason, WAG could very well surpass CVS in the near future.

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As of this writing, Gerelyn Terzo did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/walgreen-wag-cvs-health/.

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