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Last year, Walgreen (WAG), the largest drug chain retailer in the U.S., was losing its customers due to its issues with Express Scripts Holding (ESRX). For this, Walgreen is adopting various strategies to regain consumer traffic toward its stores. These strategies will have a significant impact on the top line of the company. In this article, we have analyzed its recent alliance and acquisition, which will play a key role in its future earnings.

Resolved issues - improving the company's top line

Express Scripts Holding is a Pharmacy Benefit Management, or PBM, company, acting as a middleman between drug manufacturers and retailers. Walgreen's contract with Express Scripts was facing payment issues, and Walgreen customers were moving toward other drug retailers. Due to this, the company witnessed a revenue decline of approximately $550 million in 2012 from the previous year. Both the companies resolved the issue, and by early 2013, drug manufacturers, which are clients of Express Scripts, can now include their drugs in Walgreen stores. Consequently, in August 2013 Walgreen's sales improved 5.6% year over year.

To attract customers toward Walgreen stores, both companies recently announced the launch of a Smart90 program for Express Scripts customers. This program will allow subscribers of Smart 90 to receive medication either through mail or in-stores at discounted prices. This plan will be available to customers by early 2014. We believe that the plan will ease buying drugs at Walgreen's stores, and it will help the company gain customers from its competitors, impacting revenue.

Expanding market presence

Walgreen has over 8,500 locations across the U.S. and is the largest drugstore chain in the country. To increase its market presence, the company is expanding its locations in North Carolina, which covers 15 metropolitan areas with a huge population. Walgreen plans to acquire privately owned regional pharmacy chain Kerr Drug, which will include 76 retail drug stores, a distribution center and specialty pharmacy business. We believe this acquisition will generate more customer traffic as the acquired stores are in the most populated areas, contributing toward the company's revenue.

Revenue Analysis

Year

Revenue USD $ in Million

2008

59,034

2009

63,335

2010

67,420

2011

72,184

2012

71,633

With these 5 years historical figures, we calculated revenue CAGR of 4.88%. This gives us the expected revenue of $75,071 by this fiscal end. This upsurge in the revenue will have a positive impact on the company's revenue per share. Currently, the total number of outstanding shares is 945 million. This gives us the revenue per share of $79.44, an upsurge from $75.80 last year. The upsurge in this valuation multiple is a positive sign for the company. It will generate more revenue per share.

Generic Drugs - improving the company's bottom-line

Generic drugs are produced and distributed without patent protection, meaning lower costs than branded drugs. Being low cost, gross profits on these products are 50% higher than branded drugs. Their inexpensive nature drives demand, and according to an article in Forbes, an estimated $15 billion worth of branded products will be introduced without patent protection in the next three years. For this, the company had previously taken steps by joining hands with AmerisourceBergen (ABC), a drug distribution company, and its operations recently started to distribute pharmaceuticals to Walgreen.

This is a 10-year partnership, which will allow Walgreen to source all AmerisourceBergen's drugs. This partnership will also include sourcing all generic goods which will be distributed to more than 8,100 Walgreen stores across the country. We believe that this partnership will add to the bottom line of the company, as Walgreen will have easy access to all generic drugs, and it will be able to fulfill the demand requirement for generic drugs.

In the same industry, CVS Caremark (CVS) is another player that witnessed an upsurge in its margins due to the sale of generic products. In the second quarter of 2013, the company's net income grew by 16% year over year. The company also witnessed this growth rate on the heels of a dispute between Walgreen and Express Scripts, which caused customers to switch to CVS stores. However, various strategies taken by Walgreen will add pressure to CVS' top line. With this, CVS' earnings growth is expected to witness a downfall to 12.23% by the end of 2014 from 14.89% by the end of this year.

Conclusion:

With the company's strategies of acquisitions and partnerships for gaining the customers, it possesses strong expected earnings growth of 23.81% by the end of 2014 from 10.53% this year. As far as its valuation is concerned, its revenue is also expected to rise in the future, as depicted above. Henceforth, this stock is a buy.

Source: Walgreen: Right Time To Invest In This Drug Store?

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.