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Comparing Walgreens Boots Alliance, Inc. (WBA) and Costco Wholesale Corporation (COST)

Walgreens Boots Alliance, Inc. (NASDAQ:WBA) shares are down more than -2.40% this year and recently increased 0.61% or $0.43 to settle at $70.88. Costco Wholesale Corporation (NASDAQ:COST), on the other hand, is up 25.91% year to date as of 09/18/2018. It currently trades at $234.35 and has returned -4.04% during the past week.

Walgreens Boots Alliance, Inc. (NASDAQ:WBA) and Costco Wholesale Corporation (NASDAQ:COST) are the two most active stocks in the Drug Stores industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect WBA to grow earnings at a 11.64% annual rate over the next 5 years. Comparatively, COST is expected to grow at a 12.21% annual rate. All else equal, COST’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 4.26% for Costco Wholesale Corporation (COST). WBA’s ROI is 11.90% while COST has a ROI of 16.00%. The interpretation is that COST’s business generates a higher return on investment than WBA’s.

Cash Flow



Earnings don’t always accurately reflect the amount of cash that a company brings in. WBA’s free cash flow (“FCF”) per share for the trailing twelve months was +1.42. Comparatively, COST’s free cash flow per share was +2.95. On a percent-of-sales basis, WBA’s free cash flow was 1.19% while COST converted 1% of its revenues into cash flow. This means that, for a given level of sales, WBA is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. WBA has a current ratio of 0.90 compared to 1.00 for COST. This means that COST can more easily cover its most immediate liabilities over the next twelve months. WBA’s debt-to-equity ratio is 0.54 versus a D/E of 0.00 for COST. WBA is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

WBA trades at a forward P/E of 10.99, a P/B of 2.54, and a P/S of 0.55, compared to a forward P/E of 30.25, a P/B of 8.47, and a P/S of 0.76 for COST. WBA is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. WBA is currently priced at a -0.24% to its one-year price target of 71.05. Comparatively, COST is 0.83% relative to its price target of 232.41. This suggests that WBA is the better investment over the next year.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. WBA has a beta of 1.03 and COST’s beta is 0.94. COST’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. WBA has a short ratio of 3.62 compared to a short interest of 3.05 for COST. This implies that the market is currently less bearish on the outlook for COST.

Summary

Costco Wholesale Corporation (NASDAQ:COST) beats Walgreens Boots Alliance, Inc. (NASDAQ:WBA) on a total of 8 of the 14 factors compared between the two stocks. COST is more profitable, generates a higher return on investment, has higher cash flow per share, higher liquidity and has lower financial risk. In terms of valuation, WBA is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, COST has better sentiment signals based on short interest.

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