Friday, December 21, 2007

Walgreen's health improves

Back by popular demand; I'm going to continue to track a key stock for the moneygardener, Walgreen Company (WAG).....

Looking back, in WAG's last quarter (4th quarter) which was announced on October 1, 2007, the company reported a slight decrease in earnings per share (EPS) from the prior year. This sent the stock into a violent tailspin where it actually ended up declining about 24% over the next few months. Higher expenses and some lower reimbursements on some popular generic drugs were to blame. You can clearly see the serious drop in the share price on google finance WAG chart. My reaction to all this was clear on this early October post, where I doubled my position in the stock. At that time Walgreen CEO Jeff Rein indicated that management was going to make cost cutting a priority to try squeeze out some more earnings growth in the short term, while the weaker generic environment and difficult comparable numbers lingered.

Fast forward to December 21 when WAG announced its first quarter results. Walgreen beat analyst expectations by putting up EPS of $0.46 per share, compared with the average analyst estimate of $0.44. Forty six cents represents earnings growth of about 6% from last year. This report was up against a stellar 1st quarter of 2007 where the company increased EPS by 26% from Q1 2006. Overall revenue was up over 10% in the latest quarter, and the important retailer metric, same store sales growth was up over 5% in the quarter which is a very healthy number for a U.S. retailer in this environment.

Management is also showing definite signs of delivering on their cost cutting initiatives. Sales and general administration costs increased 9.5% year over year, while sales increased 10.4%. These costs actually increased 18% in the year prior. Walgreen is seeing especially strong sales on its private label brands as the economy softens and consumers look for more value. While the first half of the year will remain "challenging'' for the company's profits, there should be improvement in the second half, Rein said. "We are recession-resistant, but not recession-proof,'' Rein said. The stock ended the day up over 6% at $38.47.

My impression of the latest quarter is that they did what they had to do cost wise to at least improve modestly on some superb numbers from last year. I am expecting Walgreen to grow earnings by a slower pace than they have in the recent past in 2008, probably by around 8-10%. The last quarter seemed to be a bit of a wake up call for the expense management side. 2009 will likely be a better year for WAG as they go up against easier comparables, the drug environment improves, and perhaps the U.S. consumer picks up. With respect to the stock valuation, under $40 still looks pretty attractive using a moderate growth rate of 12%, and a very conservative P/E of 17x. There is really no rush to get into the stock though as short term expectations are probably still tempered due to Rein's comments.

Long term Walgreen couldn't look better as while America ages WAG is building convenient, well run drug stores, and also adding 'Take Care Health Clinics' inside these stores. Currently they operate 119 clinics and by the end of calendar 2008 they expect to operate 400.


John said...

I've been watching WAG, as well and think that now might be a good time to get in for the long-term.

I think they have a good competitive position, a good history of opening new stores in good locations, and very honest, stable management (only five CEOs in the past century!). They also have a healthy ROE which is my favorite thing to see.

Morningstar estimates 10% sales growth for the next five years, with profit margins increasing along the way. They also think the company can double the number of stores over the next decade.

The biggest thing that scares me out of this stock is competition from Wal-Mart. Also, CVS recently merged with Caremark, a pharmacy benefits manager, and Walgreens may end up having catch up by doing something similar.

-John (Investing for Everyone)

MG said...

The CVS move is probably a good one in my opinion, and really, long term I believe CVS will be a good hold as well. I just think WAG is fundamentally a stronger company than CVS. WAG shares are much cheaper currently than CVS as well. The Wal-Mart factor does not worry me in the least. Big Box competition is a different animal. WAG should succeed out because of convenience, and as America ages convenience will become more and more important. Also, with high gasoline prices, being closer to the customer is an advantage.

Anonymous said...

WAG waited too long to split the stock again. Investors who are not scared of a little more risk and who want bigger returns and more frequent splits will continue to get seduced by CVS. Indeed wag has been historically very stable...but they are getting quite stale.

MG said...


A split is just a a split. Would you rather have two half apples or a whole apple? Personally I am indifferent.