Drugstore chain Walgreen Co (NYSE:WAG), executed some interesting strategic moves over the past year with CVS Caremark Corp (NYSE:CVS), Express Scripts (NASDAQ:ESRX), and AmerisourceBergen (NYSE:ABC) to continue on the growth trajectory and strengthen its position within the market place.
Walgreen extended its agreement to fill prescriptions for CVS Caremark Corp on May 13, 2013. As part of the deal, customers with prescription drug benefits managed by CVS Caremark can have their prescriptions filled at stores operated by Walgreen. The news bodes well for Walgreen, as it is likely to aid in driving revenue growth for the company.
In 2012, Walgreen suffered a revenue hit 1 when it went nearly nine months without a new agreement to do business with Express Scripts Holding Co. (NASDAQ:ESRX), the nation's largest pharmacy benefits management company 2.The lapse resulted in some of Walgreen customers migrating to competing stores to fill their prescriptions. However, the two companies ended their dispute effective September 2012 and the return of Express Scripts prescriptions resulted in Walgreen posting a growth in profits for fiscal Q2 2013. Net profits increased about 11% to $756 million when compared to the same quarter one-year prior.
During the earnings call Walgreen also announced a 10-year partnership with pharmaceutical services firm AmerisourceBergen. Under the agreement, AmerisourceBergen will distribute Walgreen branded pharmaceutical products.Much of what Walgreen sells are bulk, low-profit prescriptions; by combining its distribution in the United States and Europe with AmerisourceBergen, Walgreen will be able to negotiate better prices for those bulk drugs. In addition, it will have new access to more specialized drugs.
Based on Market IQ's proprietary Fundamental metrics, Walgreen is fairly priced relative to its peer group (see below).
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The above Quality - Value chart consists of the following companies: Walgreen Co (NYSE:WAG), CVS Caremark Corp (NYSE:CVS), and Shoppers Drug Mart Corp (TSX:SC.CA).
The company's Qualitative strengths can be seen in multiple areas such as Net Income, Financial Strength and EPS growth.
- Since the same quarter one year prior, Net Income for Walgreen increased by 10.7%. Net Income growth exceeded industry average of 4.8%, indicating that Walgreen has strong Profitability metrics relative to its peers.
- Current Interest Coverage ratio of 22 compares favorably to the industry average of 16.61 exhibiting Walgreen's strong ability to meet its short-term applications.
- Walgreen's EPS growth of 12.5% is greater than the industry average of 9.4%.
According to Market IQ's Valuation metrics , Walgreen is cheaper than 60% of its peers and offers good upside potential. Walgreen is currently trading at a Price to Cash Flow (P/CF) multiple of 19.28 and a Price to Sales multiple of 0.66. Both these metrics are relatively lower compared to its peers 3, indicating better Investment Value associated with Walgreen.
Social sentiment for Walgreen has been consistently bullish since December 2012. Looking past the normal volatility in the Sentiment chart below, we only see bullish spikes in sentiment — no pre-dominant negative sentiment dips except on December 21, 2012 when the company missed Fiscal Q1Earnings estimates.
The following is an overview of news, based on chatter pertaining to the company on various social media channels.
- December 21, 2012: Walgreen announces FQ1 earnings; EPS of $0.58 misses by $0.1. Revenue of $17.3B (-4.6% Y/Y) misses by $0.2B.
- January 14, 2013: Walgreen declares Q1 dividend of $0.275 per share.
- February 11, 2013: Walgreen expected to benefit from strong revenue growth, after a record number of flu shots were administered in 2013.
- February 14, 2013: Walgreen recorded 6.3% growth in sales for January 2013.
- March 13, 2013: UBS upgraded Walgreen to a Buy rating from Neutral and set a $48 price target.
- March 19, 2013: Q2 EPS of 96 cents beats by analyst estimates by 3 cents.
- Mach 20, 2013: Walgreen to buy a stake in AmerisourceBergen enabling the company to increase its sales of pricey specialty drugs.
- April 10, 2013: Walgreen declared Q2 dividend of $0.275 per share, in line with previous dividend.
Market IQ maintained a strong bullish sentiment on Walgreen since December 2012. The chart below, which overlays Buzz, Sentiment, and price shows how Social Sentiment has dictated a positive trend in Walgreen's stock price over the past 6 months.
Despite stellar returns this year, the drugstore still looks attractively Valued compared to its peers. Additionally, with an immaculate track record of increasing dividends, Walgreen is a good fit for income investors — the company has increased its dividend for 37 consecutive years and offers a current dividend yield of 2.2%. With the company's strong moat in the pharmacy business, and strategic partnerships on its plate, investors are likely to benefit from steady capital gains in the years to come.
1Due to the impasse with Express Scripts, Walgreen wiped out $4 billion in annual sales from its books.
2Walgreen and Express Scripts stopped working together due to a contract dispute between the two companies pertaining to pricing issue.
3Walgreen's peers have an average Price to Cash Flow (P/CF) multiple of 20.54 and a Price to Sales multiple of 0.71.
This commentary is for informational purposes only and does not constitute investment advice. The opinions offered herein are not recommendations to buy, sell or hold securities. Market IQ expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.