Is Walgreen Still a Winner?

With shares of Walgreen Co. (NYSE:WAG) trading at around $49.51, is WAG an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock's Movement

Walgreen was rated on OUTPERFORM here on March 12. It has had a good run since that time, but have circumstances changed? There will be a lot of information below, but perhaps the most important fact is that 75 percent of the U.S. population lives within 3 miles of a Walgreens. One of the biggest selling points that most people already know about is the rise in generics, which means improved margins. Getting back on board with Express Scripts Holding Company (NASDAQ:ESRX) was also a big move. In addition to that, Walgreen inked a 10-year deal with AmerisourceBergen Corporation (NYSE:ABC). This will increase Walgreen's potential in brand and generic drugs on a global scale. Let's take a look at some other positives for Walgreen, as well as some negatives.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Positives:

Margin expansion Traction in Balance Rewards loyalty program Future share repurchase program likely 2.20 percent yield (higher than peers) Analysts like the stock: 15 Buy, 6 Hold, 2 Sell Large insider purchase on April 18 at $48.62 (insider purchases are rare these days)

Negatives:

Wal-Mart Stores Inc. (NYSE:WMT) is a growing threat CVS Caremark Corporation (NYSE:CVS) is an ever-present nuisance for Walgreen Still fighting to win back previous customers EPS decline in 2012 Revenue decline in 2012

Now let's take a look at some comparative numbers. The chart below compares fundamentals for Walgreen, CVS, and Rite Aid Corporation (NYSE:RAD). Walgreen has a market cap of $46.59 billion, CVS has a market cap of $71.48 billion, and Rite-Aid has a market cap of $2.38 billion.

	WAG	CVS	RAD
Trailing   P/E	21.86	19.19	21.96
Forward   P/E	13.33	13.16	16.47
Profit   Margin	2.91%	3.15%	0.47%
ROE	12.19%	10.25%	N/A
Operating   Cash Flow	$4.41 Billion	$6.67 Billion	$819.59 Million
Dividend   Yield	2.20%	1.60%	N/A
Short   Position	1.40%	0.90%	5.00%

 

Let's take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Strong         

The debt-to-equity ratio for Walgreen is stronger than the industry average of 0.40.

	Debt-To-Equity	Cash	Long-Term Debt
WAG	0.34	$2.44 Billion	$6.36 Billion
CVS	0.26	$1.38 Billion	$9.83 Billion
RAD	N/A	$129.45 Million	$6.05 Billion

 

T = Technicals Are Strong  

Walgreen has performed well over a three-year time frame. Rite Aid has been the top performer in this group, but that's not likely to last. Over the long haul, Walgreen and CVS are highly likely to outperform Rite Aid.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

	1 Month	Year-To-Date	1 Year	3 Year
WAG	3.82%	34.63%	42.90%	48.28%
CVS	6.28%	21.40%	31.68%	63.00%
RAD	40.00%	95.59%	79.73%	79.73%

 

At $49.51, Walgreen is trading above all its averages.

50-Day   SMA	45.15
100-Day   SMA	41.83
200-Day   SMA	38.34

 

E = Earnings Have Been Steady                              

Earnings suffered a setback in 2012, but looking at the past five years, there is consistency. Revenue had been improving on an annual basis until a slight setback in 2012.

	2008	2009	2010	2011	2012
Revenue   ($)in   billions	59.03	63.64	67.42	72.18	71.63
Diluted   EPS ($)	2.17	2.02	2.12	2.94	2.42

 

When we look at the previous quarter on a year-over-year basis, we see flat revenue and a slight increase in earnings. However, on a sequential basis, there were impressive improvements in both revenue and earnings.

	2/2012	5/2012	8/2012	11/2012	2/2013
Revenue   ($)in   billions	18.65	17.75	17.07	17.32	18.65
Diluted   EPS ($)	0.78	0.62	0.39	0.43	0.79

 

Now let's take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Support the Industry

For many people, medicine is a necessity, not a luxury. People are also living longer, and with baby boomers retiring in droves, the industry is likely to have a bright future. Technological advances will also lead to new diagnostic products, which might be sold at drug stores. Of course, there's also the increased popularity of generics, which means higher margins for drug stores. The only big negative is if the stock market crashes. If that happens, then there will be pain, but Walgreen and CVS should hold up better than most companies throughout the broader market. It could also be looked at as an opportunity to buy more stock. Furthermore, there will be dividend payments along the way. All of this doesn't pertain to Rite Aid, which is a much riskier investment.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Conclusion

Walgreen's long-term planning is excellent. The big concern is the stock market being overheated, not the company itself. However, the market could be propped up for another two years. Nobody knows how that will play out. The good news is that Walgreen will be around for a long time, and that being the case, any downward moves in the stock price should present an opportunity. Buying in increments is always recommended in order to reduce downside risk.