[Investor Place] Both are fairly valued, but Walgreen's the better value

Do drugstores offer investment value? It’s a tough question because drug stores have changed along with the health care market. While CVS Caremark?(NYSE:CVS) has merged with a pharmacy benefit manager (PBM) — a company that negotiates with health care product and service providers on behalf of corporate health plans — Walgreen (NYSE:WAG) has remained pretty much the same except that, like CVS, it offers in-store medical care.

In 2006, CVS merged with Caremark, a PBM, in a $26.5 billion deal that finally closed in 2007. The idea was to create a $75 billion drug distributor whose greater scale would enable it to negotiate bigger volume discounts with the pharmaceutical companies. This deal was intended to?lower corporate health care costs while achieving cost savings to help pay back the price premium.

Meanwhile, Walgreen has stuck?closer to its knitting. In 2010, it spent $1.1?billion to expand its presence in New York City by acquiring Duane Reade. The deal more than doubled the number of pharmacies that Walgreen operates in the city.

Meanwhile, both CVS and Walgreens began in-store health clinics staffed by nurse practitioners in 2009. These clinics allow patients to obtain care for relatively minor health problems without an appointment. And after they are treated, the patients can buy their prescriptions in the stores.

But do these trends make CVS and Walgreens attractive investments? Here’s my take:

• Walgreen: Profitable, growing, fairly priced stock. Walgreen revenues are?up 6.4% to $71 billion in the past year, during which it posted a $2.4 billion profit, up 4.2%. The stock is fairly priced based on a price/earnings-to-growth ratio of 1.02 (where 1.0 is considered fairly valued). Walgreen’s P/E is?13.2 on earnings forecast to grow at 12.9% to $2.96 in fiscal 2012. On Tuesday, Walgreen reported a 69% pop in net income but also ! terminat ed a $5.3 billion deal with Express scripts (NASDAQ:ESRX) because Walgreen felt it was not getting paid enough to fill its prescriptions.
• CVS: Profitable,?fairly priced?stock. CVS revenues fell 2.3% to $101 billion in the past year, and its net income of $3.4 billion?was down 7.4%. Although it has a slim profit margin, the stock is?fairly priced based on a PEG ratio of 0.98. CVS’ P/E is?14 on earnings forecast to grow at 14.3% to $3.18 in fiscal 2012. CVS’ second-quarter adjusted earnings of 65 cents beat expectations by a penny and were the same as the previous year. Contract wins in its PBM sector drove that unit��s 23.2% revenue increase, but CVS��s margins remain tight.

I like Walgreen better than CVS because of its more rapid revenue and profit growth. CVS has yet to demonstrate that its hybrid model can lead to profit growth.

Peter Cohan has no financial interest in the securities mentioned.