Walgreen Finding Growth After Debacle

| About: Walgreens Boots (WBA)

Over the past four years, Walgreen (WAG) has missed EPS expectations five times. Three of those five misses have come in the past year and a half. Those EPS misses have come in lockstep with the debacle Walgreen had with provider Express Scripts (NASDAQ:ESRX) when contract negotiations broke down. When Walgreen walked away from Express Scripts, WAG was under the wrong impression that Express Scripts had no leverage and nowhere else to go.

Enter CVS Caremark (NYSE:CVS) into the picture. CVS swooped in giving Express Scripts a sweetheart deal to provide its product without an exclusivity clause, which Walgreen had been requiring. The deal between CVS and ESRX could have had catastrophic results for Walgreen. Walgreen lost nearly 60 million prescriptions to rival competitors according to reports. Walgreen quickly realized that Express Scripts had won the fight, and quickly worked to form a new deal with it to stem the tide of lost revenue, prescriptions and customers. After both sides agreed to new terms, Walgreen worked quickly to regain customers. Walgreen even went so far as to offer any Express Scripts customer a $25 Walgreen gift card in an attempt to regain customers.

The loss of customers, and scripts, is easy to see just by looking at Walgreen's earnings. Compare 2011 EPS each quarter to 2012 EPS by quarter. In 2011, WAG posted EPS of $0.62, $0.80, $0.65 and $0.57 respectively. In 2012 Walgreen posted EPS of $0.63, $0.78, $0.62 and $0.53 respectively. A year-over-year per quarter result of obviously shrinking earnings per share.

In 2012, Walgreen inked the new contract with Express Scripts, and continued opening new stores; opening a net 175 stores. Walgreen knew what it had to do. Walgreen needed to expand the customer base and broaden the revenue stream. Walgreen began advertising its "Well at Walgreen" services heavily, encouraging customers to go in stores and speak with a healthcare professional.

Between all of the initiatives, it appears Walgreen has started regaining some of those customers that departed. Walgreen just reported earnings on March 19, and posted an increase in EPS for the first time in a year and a half on a YOY basis. In the Q2 of 2012, Walgreen reported just $0.78 EPS, just a couple of days ago Walgreen reported Q2 EPS of $0.96. Walgreen's fundamentals also look attractive at this point. Currently, Walgreen trades with a P/E of 20.5, a Forward P/E of 12.49, a P/S of 0.61, and a PEG of 1.09. Compare that to the S&P 500 average, which trades with a current P/E of 20.6 and a Forward P/E of 17.3. The combination of those metrics make Walgreen look quite attractive at this level, despite the recent run-up in price.

Walgreen's continual efforts to both regain customers, as well as broaden its product offerings for customers is finally showing signs of paying off. In fact, as of August 2012, Walgreen had added $7 million in long-term investments to the balance sheet for the first time in years. WAG management is devoted to returning value to shareholders, and all signs point to management learning from the debacle with Express Scripts. Look for Walgreen to enjoy healthy price appreciation over the coming years. My personal 52-week price target: $57.00

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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