Wednesday's market sentiment was driven by extreme greed with the Fear & Greed Index at 92, which had decreased from the previous close of 94. As reported by CBOE, the total put/call ratio was 0.95 for the day. The index put/call ratio was 1.15, and the equity put/call ratio was 0.67. The CBOE volatility index (VIX) put/call ratio was 0.45. The top stock had been identified through our daily options scanning process, with the scanning criteria where the daily call volume ratio was above 2.00 (2x of the average call volume) with a call volume above 10,000.
Average Call Volume
Daily Volume Ratio
Walgreen Company (WAG)
Source: Schaeffer's Research
Unusual option activities can be an indicator or precursor of a major movement for the underlying stock. This article will try to identify the bullish factors for Walgreen Company.
Walgreen Company is the nation's largest retail pharmacy with 8,516 drugstores in the United States. WAG had increased 9.32% and closed t $39.87 on January 30, 2013 since our last article, 'Disappointing Numbers, But Walgreen Is Turning Around', published on December 25, 2012.
Focused growth strategy. Walgreen is focused on three areas of opportunity ahead: Delivering a complete Well Experience by transforming the customer experience across all of the company's touch points, channels and formats; Transforming the role community pharmacy plays in health care by offering unparalleled access to innovative, high quality and affordable health and wellness services; Creating an unprecedented and efficient global platform through its strategic partnership with Alliance Boots GmbH.
Returning customers. The new contract with Express Scripts (ESRX) boosts positive sentiment as traction in prescription sales at Walgreen continues with the return of customers. Walgreen is winning back customers as fast as they were leaving during a nearly nine-month period where customers who had Express Scripts benefit plans could not get discounts at Walgreen pharmacies. The management believed last quarter was the turning point with the increasing pace of return of Express Scripts customers.
Gross margin expansion. While the generic wave has dragged sales over the last few quarters, WAG expects the gross margin expansion on account of higher generic prescription drug sales to continue in the near term.
Balance reward program. More than 45 million customers had signed up since the program launched as last reported after the earnings release.
Acquisitions. Walgreen spent $6.7 billion to acquire a stake in Alliance Boots and $438 million on a drugstore chain operating in the mid-South under the USA Drug, Super D Drug and Med-X names. Walgreen is reporting the gains a quarter after they occurred to address audit and regulatory requirements.
Analysts' Calls. Raymond James upgraded WAG to Outperform with a price target of $45 on January 2, 2013. On January 7, 2013, Jefferies upgraded WAG from Hold to Buy with a price target of $47.00 from the previous target of $40.00 and commented, "We are upgrading WAG to Buy from Hold as our research continues to suggest that purchasing synergies are materializing faster than expected. In addition, the potential for higher script volumes (Flu/Med D/ObamaCare) could also drive better profitability. With valuation at the low-end of its range and at roughly a 2x P/E discount to CVS, investors could be rewarded with both EPS surprises and multiple expansion over the next 12 months."
Standpoint Research downgraded WAG to Hold from Buy on January 16, 2013. Lastly, Zacks reiterated the Neutral recommendation on WAG as the company is showing signs of improvements, but still facing tough business environment.
CVS Caremark Corporation (CVS), one of WAG's major competitors, made a new 52 weeks high of $52.73 on January 24, 2013. CVS has a solid guidance for 2013, and the management asserts that the company has exceeded its financial goal for 2012. CVS continues to benefit from the retention of WAG customers from the earlier Walgreens-Express Script impasse. CVS currently offers a dividend yield of 1.74% and plans to increase its dividend payout ratio to 25% (currently 21%) in 2013 and 30% through 2015. Rite Aid Corporation (RAD), a retail drugstore chain in the United States and another competitor for WAG, was upgraded by Zacks with a target price of $1.75 as the company showed an outstanding performance during Q3 of fiscal 2013, as quoted, "Results also improved sequentially as rise in front-end sales, favorable script trends and introduction of new generic medications boosted the quarterly profits. Going forward, Rite Aid remains focused on expanding its portfolio of generic medications, which in turn will facilitate the company in enhancing margins. Moreover, Rite Aid is expanding its pharmacy and clinical services through its Wellness+ customer loyalty program and remodeling its wellness stores. We believe these programs and initiatives will enable the company to broaden its customer base and facilitate it in sustaining its upbeat performance." Walgreens is facing strong competitions from CVS Caremark and Rite Aid.
Key Stats and Valuation
WAG has an enterprise value of $42.39B with a market cap of $37.68. WAG has a total cash of $1.85B with a total debt of $6.38B. WAG generates an operating cash flow of $4.22B with a levered free cash flow of $2.36B. WAG has a lower revenue growth (3 year average) of 4.2, as compared to the industry average of 5.5. WAG has a lower operating margin of 4.6%, ttm, compared to the average of 5.2. WAG has a net margin of 2.8, which is the same as the industry average. WAG's ROE of 12.0 is higher than the industry average of 11.3. WAG's P/E of 18.1 is lower than the industry average of 18.2 but higher than WAG's 5 year average of 14.9. WAG has a forward P/E of 11.8, which is lower than S&P 500's average of 13.3.
Technically, WAG is bullish with the RSI (14) showing a strong buying momentum at 70.78. WAG is currently trading above its 50-day MA of $36.76 and 200-day MA of $34.23. However, the MACD (12, 26, 9) is showing a neutral toward slightly bearish trend with the MACD Histogram at -0.021.
The most active call was March 15, 2013 call at the strike price of $41.00 with a call volume of 10,465 and an open interest of 404. The implied volatility is 13.7, and the chance of breakeven is 21.96. The historical volatility for WAG is 15.19 for 1 month, 17.53 for 3 months, and 22.27 for 1 year.
The last reviewed credit put spread of April 20, 2013 $30/$32 put is currently yielding 10.98% return on margin, achieving 70.4% of the maximum gain of 15.6%. Investors can consider taking the profit after the recent price rally. A new credit put spread of April 20, 2013 $34/$36 can be reviewed if WAG pulls back to $37/$38 price range.
Note: All numbers/prices are quoted from the closing of January 30, 2013 with the data provided from Barron's, Morningstar, Schaeffer's Investment Research, Inc., Google Finance, and Yahoo Finance. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.
Disclosure: I am long WAG.