Walgreen Is an Unquestionable Buy

 | Jun 28, 2013 | 1:00 AM EDT
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Those who bought shares of drugstore giant Walgreen (WAG) last Wednesday, above $51, aren't happy right now. This week, the company released fiscal third-quarter results for the three months ended May 31, and the numbers came in a bit shy of estimates.

As a result, the stock cratered briefly to $44.04 before recovering slightly, and it closed Thursday at $44.92. Should you now stay away from this anti-momentum stock, or should you plunge in while it's depressed?

Walgreen (WAG) -- Hourly

Following the earnings report, analyst estimates were immediately ratcheted down. Zacks now projects earnings for fiscal 2013 and 2014, respectively, at $3.21 and $3.62 per share. Those numbers exclude nonrecurring acquisition-related expenses. (See this Real Money Pro piece for more on this accounting topic.)

On that adjusted basis, Walgreen currently trades for about 14x this year's estimates and 12.4x those for fiscal 2014. The stock has a 10-year median multiple of 20x -- and, according to Standard & Poor's, Walgreen has given investors a chance to sell for at least 16x earnings during each of the past 10 years. Many times, these shares commanded much higher price-to-earnings ratios than even those multiples. In fact, Value Line assumes a normalized 17x multiple in calculating its three-to-five-year target price range of $65 to $85.

Walgreen (WAG) -- Annual P/E Ranges, Fiscal 2003-2012

That implied P/E level squares nicely with the S&P's "fair value" calculation of $58.50. The firm's goal price on the stock is 18.2x Walgreen's current-year profit estimate, and about 16.2x the fiscal 2014 projection.

Walgreen also garners high grades from Value Line for financial strength, safety, share price stability and earnings predictability. Finally, it scores in the top 2% of the entire S&P research universe in terms of what the firm calls "investability."

Walgreen (WAG) -- S&P IQ Ratings

On top of all this, shareholders have gotten used to annual dividend increases. The $0.275 quarterly payout now provides an attractive and well-covered 2.45% current yield. That represents the second-best yield ever for Walgreen holders.

Even somewhat pessimistic traders could expect to see $54 or better within a year. That's more than 20% above the present quote. Add in the yield, and total-return potential looks even better.

In the meantime, last year's battle with Express Scripts (ESRX) has been resolved, and the integration with European-based Alliance Boots is already accretive. The merger is likely to contribute even more favorably as corporate redundancies are eliminated. 

Walgreen's selloff, therefore, is to be welcomed -- not shunned. Indeed, I added to my personal position on both Wednesday and Thursday. To put that pessimistic 20% upside projection in perspective, if you were to see such annual gains on your entire portfolio, you'd double your money every 3.6 years on a pretax basis.

So, at today's price, Walgreen's is a solid buy.

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