Walgreen Offers Prescription for Growth

04/03/2007 12:00 am EST

Focus:

Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of DRIP Investor, says blue-chip drugstore chain Walgreen is posting solid sales and earnings gains, yet the stock is out of favor because of increased competition.

Investors are an impatient lot. If a stock doesn’t do much, we tend to get bored and dump it.

Walgreen (NYSE: WAG; $46) is one stock in which, quite honestly, investors couldn’t be faulted for getting bored. The shares of this drugstore retailer have been frustratingly sluggish for the last couple of years.

Walgreen is the nation’s largest drugstore chain based on revenues, with fiscal 2006 (ending August) sales of $47.4 billion. The company operates 5,611 stores in 48 states and Puerto Rico. Walgreen also provides additional services to pharmacy patients and prescription drug and medical plans through its managed-care division.

To be fair, the company is doing its part to try to push the stock higher. Operating results continue to be impressive, and record profits are expected for this year. Profits increased 24% in the fiscal second quarter ended February, with per-share earnings of $0.65 beating the analysts' consensus estimate by four cents a share. Revenue grew more than 14% for the quarter.

Especially impressive was growth in same-store sales (sales open at least one year) for the quarter: same-store prescription sales rose 11% [from the first quarter of fiscal 2006], while same-store sales of nonprescription items grew nearly 6%

Still, the industry is in the midst of some major shifts, including the aggressive entry of Wal-Mart (with its $4 generic-drug prescription initiative) and a possible merger of one of Walgreen’s chief competitors (CVS) with a major pharmacy benefits manager (Caremark). Caremark is also being pursued by Express Scripts, another pharmacy benefit manager, so a merger with CVS is not a done deal at this point. Still, the combination of a drugstore chain and a pharmacy benefits manager could create a new dynamic in the drugstore industry.

The uncertainty from these events has helped to keep Walgreen’s stock under wraps. Nevertheless, at some point Wall Street will have to give Walgreen its due, especially if the firm continues to post double-digit same-store sales and profits.

On the plus side for Walgreen are demographics, specifically an aging population. Indeed, the number of senior citizens will likely double over the next three decades, creating strong demand for prescription drugs.

[Changing hands] at 22 times the consensus fiscal 2007 earnings estimate of $2.03 per share, Walgreen is trading at a fairly modest premium to the overall market despite the prospects for double-digit revenue and earnings growth for the company.

I am sticking with the stock and recommend you do the same. And for investors who don’t own these shares the current lull is offering a good time to initiate positions. The stock is a high-quality holding for any DRIP portfolio. Please note that Walgreen permits initial purchases with a minimum of just $50.

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