Walgreen Prescription: Wait for a Pullback

 | Sep 24, 2013 | 9:00 AM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

wag

,

abc

Yesterday, Walgreen (WAG) closed just $0.61 from an all-time high. Year-to-date the stock is up some 47% and shows no signs of slowing down anytime soon. Does Walgreen have the right prescription for continued appreciation? I decided to check it out, especially since the company is set to report its fourth-quarter earnings on Oct. 1.

Earlier this month, Walgreen's announced that August same-store sales rose 4.8%, which beat the consensus expectation of 2.9%. Because of the strong comp store results, the company now expects to sales to rise 5.1% to $17.95 billion.

Prescriptions filled on a same-store basis in August rose 5.6%. Pharmacy same-store sales rose 6.4%, and front-end same-store sales rose 2.2%.

But investors are not buying the stock because of a turnaround in its retail pharmacy business. Last year, Walgreen went international. WAG bought 45% of U.K. based Alliance Boots. Alliance Boots operates over 3,100 retail pharmacies in 25 countries and is one of Europe's largest pharmacy wholesalers. Alliance Boots serves over 170,000 pharmacies, hospitals and doctors in 20 countries.

In March 2013, Walgreen announced a 10-year partnership with AmerisourceBergen (ABC). AmerisourceBergen is America's largest pharmaceutical wholesaler. WAG and Alliance have the right to acquire a 23% minority stake in ABC. Together the three companies hope to expand their global presence and collaborate on global supply chain opportunities.

With the Alliance Boots deal, Walgreen thinks it can accelerate its growth from an annualized 8% to greater than 12% by fiscal 2016. In other words, management thinks it can get from $72 billion in revenue during fiscal 2012 to over $130 billion with Alliance Boots. Together the companies estimate cost savings of at least $1 billion due to overlap of operations.

By the terms of the deal, WAG will purchase the remaining 55% of Alliance Boots it doesn't own. By combining the companies it is expected, Walgreen will handle 10% of the world's prescriptions.

Assuming things go smoothly, by 2016, Walgreen is expected to earn between $5.00 and $5.50 per share, which compares to the current $3.54 consensus estimate for the company. So when the company reports fourth-quarter earnings next Tuesday, investors will be more interested in how the partnerships and deals are progressing, rather than the retail pharmacy business. Investors who are buying the stock now need to believe that Walgreen has the right prescription three years from now when earnings are expected to be up at least 50%. The stock seems to be ahead of itself and I would wait for a pullback. A lot can go wrong over the next three years. Buying the stock at current levels could give you a headache.

Columnist Conversations

We are currently testing the key resistance decision in ICE. Do not consider an entry without a trigger!! ...
Is this the biotech revolution or the biotech bust? View Small Cap Biotechs Like Never Before: Transparency is...
EA reported June revenue of $775 mlm vs. $714 est. much better than expected. EPS of $0.19 blew away the St es...
BIDU still has some higher targets, but it's a good idea to TRAIL UP stops when you EXTEND the prior swings. ...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.