Walgreen Company (WAG) and Costco Wholesale Corporation (COST) are two large-cap retailers with strong cash flow and a healthy balance sheet. Both stocks had received positive calls from analysts recently and will be analyzed fundamentally and technically in this article. Investing strategies will also be reviewed.
WAG was up 4.24% and closed at $42.78 on March 13, 2013. WAG had been trading in the range of $28.53-$42.91 in the past 52 weeks. WAG has a market cap of $40.43B with a beta of 1.01
On March 13, 2013, UBS upgraded WAG from neutral to buy and lifted its price target from $41 to $48. UBS said recent weakness on monthly comps that are no longer benefiting from flu provides an opportunity to invest "for 'big picture' positive developments at the company over the next 1-2 years." As quoted from the report,
These 'big picture' items include: 1) underappreciated leverage to health reform in 2014, 2) stronger gross margins in 2013 (due to lack of over spending on promotion), and 3) increased visibility on Alliance Boots in both Step 1 & 2 of the transaction.
UBS raised 2013 EPS estimates from $3.36 to $3.42 due to higher gross margin assumption and UBS believes that WAG has not overinvested in its loyalty card program in an effort to win back customers lost due to the ESRX impasse. UBS also raised 2014 EPS from $3.73 to $3.85 on health reform upside.
Analysts currently have a mean target price of $42.78 and a median target price of $45.00 for WAG. Analysts, on average, are estimating an EPS of $0.94 with revenue of $18.73B for the current quarter ending in February, 2013. For 2013, analysts are projecting an EPS of $3.25 with revenue of $72.90B, which is 1.80% higher than 2012.
- There are a few positive factors for WAG:
- Strategic growth driver from Alliance Boots
- Stronger ROE of 12.0 (vs. the industry average of 11.3)
- Lower P/E of 18.5 (vs. the industry average of 24.8)
- Lower Forward P/E of 12.0 (vs. the S&P 500's average of 13.9)
- Lower debt/equity of 0.3 (vs. the industry average of 0.4)
- WAG generates an operating cash flow of $4.22B with a levered free cash flow of $2.35B
- WAG currently offers an annual dividend yield of 2.57%
Technically, the MACD (12, 26, 9) indicator is showing a bearish trend, but the MACD difference continues to converge. The momentum indicator, RSI (14), is increasing and indicating a strong buying momentum at 64.95. WAG is currently trading above its 50-day MA of $40.05 and 200-day MA of $35.19, as seen from the chart below.
How to Invest
With strategic growth drivers from Alliance Boots and by winning back customers from other competitors, WAG continues to improve its bottom line. Based on the current valuation, there is still more upside potential as sales number picks up. For bullish investors, a credit put option spread of July 20, 2013 $37/$39 put can be reviewed, which will allow investors to gain some upside credit premium or allow investors to acquire WAG stock at a price below $39 upon options expiration. Investors can also review the following ETFs to gain exposure to WAG:
- Dynamic Retail (PMR), 5.41% weighting
- Market Vectors Retail ETF (RTH), 4.57% weighting
- S&P Equal Weight Consumer Staples ETF (RHS), 2.47% weighting
Costco Wholesale Corporation
COST was down 0.32% and closed at $103.42 on March 13, 2013. COST had been trading in the range of $81.98-$105.97 in the past 52 weeks. COST has a market cap of $45.05B with a low beta of 0.68.
On March 13, 2013, BMO Capital reiterated an outperform rating and $115 price target on COST following Q2 results on Tuesday, which beat views driven by strong membership fees, slightly higher interest income, a slightly lower tax rate, and better-than-expected adjustments in minority interest. BMO's analyst, Karen Short stated,
Strong results in 2Q13 support our Outperform thesis; operating profit increased 14.6% and adjusted EPS increased 22.9%. The increases in operating profit and EPS are slightly better than the increases seen in 1Q13. We believe COST will continue to experience strong results while making progress on three of the more long-term tenets of our thesis: (1) ROIC should continue to improve; (2) market share gains will continue, given COST's superior positioning (and as evidenced by traffic trends at COST vs. peers), and (3) 4%-5% unit growth is achievable.
Analysts currently have a mean target price of $105.90 and a median target price of $109.00. Analysts, on average, are estimating an EPS of $1.03 with revenue of $24.38B for the current quarter ending in May, 2013. For 2013, analysts are projecting an EPS of $4.51 with revenue of $106.39, which is 7.30% higher than 2012.
There are a few positive factors for COST:
- Higher revenue growth (3 year average) of 11.6 (vs. the industry average of 3.9)
- Lower debt/equity of 0.1 (vs. the industry average of 0.7)
- Lower P/S of 0.4 (vs. the industry average of 0.5)
- COST generates an operating cash flow of $3.50B with a levered free cash flow of $2.28B
- COST currently offers an annual dividend yield of 1.06%
Technically, the MACD (12, 26, 9) indicator is showing a bullish trend. RSI (14) is indicating a slightly bullish lean at 57.67. COST is currently trading above its 50-day MA of $101.71 and 200-day MA of $92.96. The next resistance is $106.56, the R2 pivot point, as seen from the chart below.
How to Invest
With COST's strong cash flow generation ability and growing customer base, COST continues to be a solid long-term holding. For bullish investors, a credit put option spread of July 20, 2013 $95/$98 put can be reviewed. Investors can also review the following ETFs to gain exposure to COST:
- Market Vectors Retail ETF , 5.08% weighting
- Dynamic Retail , 5.04% weighting
- Consumer Staples Select Sector SPDR (XLP), 3.23% weighting
Note: All prices are quoted from the closing of March 13, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.