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Author: kelbon Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 19365  
Subject: Walgreen Co. (WAG) Date: 9/28/2011 12:12 AM
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As there have been a couple of threads on Walgreen recently on this board, why not a third?

Given a quick glance Walgreen does seem to be headed towards value territory given its shrinking P/E ratio and its predictable business — relatively speaking. But, given a closer look it might not be so compelling, and, at the moment the market doesn't seem to think so — is it wrong or right?

In spite of what Value Line might say, and record, Walgreen's earnings growth has been sluggish for several years. Given a "great recession" that's hardly surprising. However, WAG's been taking in more money in revenues every year at a steady clip. Unfortunately, this growth hasn't matched reported earnings growth.

The obvious question is why? The first place to look, I suppose, would be margins. Since '07 their net margin has been slowly contracting every year, up until the last quarter when it expanded a little, but it's about 10% lower than its ten year average ending in '09.

Logically, shrinking margins would affect return on capital and yes, that's shrunk too by two or three percentage points if you exclude the great recession. Long term debt doesn't help returns on capital either and up until 2008 Walgreen didn't have any, but starting in '08 it started to accumulate and is close to $2.4 billion today. Not such a big deal as this is roughly equal to one years reported earnings, but, no debt is better than a couple of $ billions worth.

Revenue has increased so predictably and evenly not because of greater systemic efficiency, that is: increased same store sales, but basically because every year Walgreen opens new stores and every year the store count increases. The store count has increased at 8% a year over the last ten; that's just more than doubling. Can the number of Walgreen stores double again over the next ten years? Doubtful. Before saturation point stores will begin to cannibalize each others sales.

Walgreen has been upping its dividend consistently since '02, but the yield at current prices isn't enough to tempt most investors to buy the stock for its dividend while they patiently wait things out. Presently the dividend yield is just over 2%.

The current P/E ratio, although it has contracted over the decade really isn't out of whack with the earnings growth the company has shown over the last five years. Margins and returns on capital have yet to turn around sufficiently to match, let alone best, those reported before the recession. If this stock is a good buy now then it has to be a successful turnaround story, even though the large ship doesn't have to swing that far, it does have to swing.

Value Line predicts that earnings, margins, and returns on equity and capital will pick up to at least pre-recession levels, and Walgreen will prove to be a safe and sound investment. Time will tell, but I'm not so sure it's a sure thing. The margin of safety in today's stock price is a little too narrow to be irresistibly tempted.

kelbon
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Author: stillwater9999 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7670 of 19365
Subject: Re: Walgreen Co. (WAG) Date: 9/28/2011 8:28 AM
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I am abit optimisitic on the growth prospects but have not yet added further, mainly because I am finding other greater bargains and want to keep some cash in the event even the market goes to even more deep bargain prices as it did in 08-09.

I did add some PRAA yesterday at $8 below a recent large insider buy by the CFO. PRAA proved itself to be recession resistant. It is a Jim Gillies favorite (he has provide excellent analysis of a somewhat complex finanical picture.)

sw

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Author: hockeypop Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7671 of 19365
Subject: Re: Walgreen Co. (WAG) Date: 9/28/2011 8:55 AM
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For a time I fell in love with CVS in large part because I think its Caremark operations were/are ahead of their time, and I deeply respect the person in charge of that operation. However, on further analysis that medical area provides as many questions as answers and is heavily regulated, AND, like WAG, what kind of moat is there when there are two or sometimes three similar stores competing with one another within a baseball throw of each other (that happens in NJ with WAG, CVS and RiteAid).

CVS was, but is no longer on my radar screen.

Hockeypop

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Author: originalupndn Big red star, 1000 posts Old School Fool Ticker Guide Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7672 of 19365
Subject: Re: Walgreen Co. (WAG) Date: 9/28/2011 9:09 AM
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Can the number of Walgreen stores double again over the next ten years? Doubtful. Before saturation point stores will begin to cannibalize each others sales.

A small point here, before the housing crash they were throwing up stores
within spitting distance of each other in the peripheral area of Phoenix.
That fringe was growing extremely fast.

OT;

Now most housing growth is in the pure retirement communities.
The cheap houses you hear about are in the working family occupied areas.

So if you are looking to have a second home in a warm climate and don't
want/need the close in amenities of a retirement community now is the time. Without any
study I would say they are half or less the price vs ret com. <$100,000

Up

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Author: kelbon Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7673 of 19365
Subject: Re: Walgreen Co. (WAG) Date: 9/28/2011 9:57 AM
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AND, like WAG, what kind of moat is there when there are two or sometimes three similar stores competing with one another within a baseball throw of each other (that happens in NJ with WAG, CVS and RiteAid).


There can be, and is, a substantial moat. WAG and CVS are essentially a duopoly; much like Lowe's and Home Depot. Another obvious duopoly: Coke and Pepsi. It comes down to customer preference of nuance and flavor, but, essentially a duopoly has eaten all the smaller fish and splits the spoils.

RiteAid is a very distant also-ran and may not even be in business much longer; they have $6 billion in long-term debt and constantly run earnings deficits.

kelbon

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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7674 of 19365
Subject: Re: Walgreen Co. (WAG) Date: 9/28/2011 9:57 AM
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UP,

I don't think it is OT. Around DC the new sub-division pattern is to have small shopping centers near and WAG has been an aggressive occupant. When housing finds its feat again I suspect that WAG will resume its course of trying to be the neighborhood pharmacy.

jack

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Author: Goofyhoofy Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7675 of 19365
Subject: Re: Walgreen Co. (WAG) Date: 9/28/2011 11:45 AM
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Walgreen's took a significant dump yesterday on news that they are pulling out of Express Scripts, a major mail order firm which is demanding lower prices to be included in the Walgreen's service network. Although they had excellent profits, this would be a real blow to ongoing operations (hardly fatal, I don't want to over-emphasize) if they can't come to terms. Both sides are playing hardball.

Walgreen's went through this with another major a couple years ago (I forget the name,) and eventually the two sides resolved the dispute, but in the meantime the stock stalled, and its growth over the past decade has not been anything but stellar.

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Author: kelbon Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7677 of 19365
Subject: Re: Walgreen Co. (WAG) Date: 9/28/2011 12:15 PM
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Walgreen's took a significant dump yesterday on news that they are pulling out of Express Scripts


Negotiations are stalled with Express Scripts at least, and the real possibility that they won't be restarted is what sent the stock price down. The partnership has resulted in $5.3 billion in revenues for WAG, no small sum that translates to about 8% of total revenues.


[…]its growth over the past decade has not been anything but stellar.

By my calculations growth in earnings has been about 11.5% annually, which includes a slowdown over the last five years to about 4.5%. The question is: can, and will, earnings growth accelerate again to its former glory, or not? The potential hit to revenues because of the Express Script situation would likely be a drag on results, at least in the short term.

kelbon

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Author: CM001 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7680 of 19365
Subject: Re: Walgreen Co. (WAG) Date: 9/28/2011 4:03 PM
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I think WAG falls into this category very nicely,

It is neither a growth stock, nor a value stock. Hence there are no catalyst for the price. It is better to leave it alone.

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Author: hockeypop Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7685 of 19365
Subject: Re: Walgreen Co. (WAG) Date: 9/29/2011 10:43 AM
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RiteAid is a very distant also-ran and may not even be in business much longer; they have $6 billion in long-term debt and constantly run earnings deficits.

I'd suggest this article agrees with you on RiteAid.
http://www.fool.com/investing/general/2011/09/29/has-rite-ai...

Hockeypop

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