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Summary

  • WAG has produced a 27% price return year-to-date and 42% in the last year. With its sharp focus on exploiting growth opportunities it is still undervalued at its current price.
  • An analysis of its financial performance over the past ten years shows that its revenues, earnings, and cash flows have grown steadily over the years with stable gross and operating.
  • Analysis of its financial performance over the past ten years shows that its revenues, earnings, and cash flows have grown steadily over the years with stable gross and operating margins.
  • WAG has consistently rewarded its shareholders with dividends. This, along with the undervaluation of the stock, makes it a good investment at its current price.

A look at Walgreen's (NYSE:WAG) financial performance over the past decade shows that it is a consistent performer with stable business. The company's improving performance tells us about the operating efficiencies that the company possesses. It has rewarded its shareholders with growing dividends. The company's growth plans are likely to create good growth in its top and bottom lines. WAG has already produced a 27% price return year to date and its one year return is 42%. Analysis of the valuation based on the consensus target price and price multiple suggest that it is still undervalued at its current price.

Walgreen has gained about 27% in stock price year to date and has produced a fantastic 42% price return in the last year. This price performance is backed by a history of consistent and disciplined financial performance. WAG is still underpriced and now is a good time to invest in this consistent company that has grown over years with operational efficiency and financial discipline.

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Source: Yahoo Finance

Consistent financial performance

WAG has a long history of consistent financial performance that tells a lot about its financial steel and strong footing in its retail business. WAG has grown steadily over the past ten years. If we look at the top line, we see that it underwent a decent growth at a CAGR of 7.2% in the past ten years. The stability of its operations can be seen in the gross margin and operating margin stability over the past ten years. The gross margins moved within a very narrow range of about 27%-29%. Presently, the gross profit margins stand at 28.5%.

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Source: Morningstar.com

Stable gross margins helped top-line growth to pour down to the operating income which grew at a CAGR of 7.1%. The operating margins also remained steady within a narrow range of 4.8% to 6% and the operating margins currently stand at 5.7%. Net income grew at a CAGR of 7.6%. Net profit growth in TTM is 15% higher than the ten year CAGR.

Sharing Success with Share Holders

WAG has consistently rewarded its shareholders with growing dividends. The dividend of $0.18 in 2004 has grown to $1.26 in the last twelve months at a CAGR of 21.5%and the current dividend yield is 1.75%. That is approximately a 10% increase in dividends in the past year. WAG has also significantly increased its payout ratio over the past 10 years from 13.8% in 2004 to 42.9%. Investors who prefer a constant stream of cash from their shares should consider Walgreen.

Cash Flow Growth

Operating cash flow increased steadily at a CAGR of 8.19% in the last decade which is in line with the net income. WAG made disciplined capital investments to continue its steady growth and free cash flow grew at a CAGR of 13%. The strong cash flow generation capacity of WAG's operations allows it to invest in future growth and also allows it to continue to reward its shareholders.

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Source: Morningstar.com

Focusing on Growth

WAG is focused on creating value for its customers. It is constantly working on introducing innovative products and services that its customers value.

WAG is focusing carefully on improving customer experience. WAG is gaining on many key performance matrices. In the last quarter comparable scripts increased 4.1% and its retail market share also increased to 19% after an increase of 20 basis points. Another milestone was the record-high level of filled scripts that reached 218 million.

Among the recent plans to fuel growth, WAG is also working on the expansion of its store chain. WAG has converted or opened 642 Well Experience stores in the first three quarters of the current financial year. Walgreen is also working on expanding in the beauty product market in the US through Boots products. These are some of the plans that WAG is working on to exploit growth opportunities. These efforts and investments are likely to create growth in the company's top and bottom lines in the coming quarters.

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Source: Company investor presentation

WAG has recently shown improvements in many other matrices as well and it is well positioned to continue to improve its performance. If we look at the most recent results of comparable store sales we see prescription sales in the quarter grew by 6.3%which is much higher than the 2% growth registered in the same period last year. Front-end sales grew 2.2% compared to last year's growth of 0.4%. Total sales grew 4.8% compared to growing by 1.4%in the same period last year. WAG is expected to continue the same growth trend in the current quarter.

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Source: Company investor presentation

Front end comparable store sales are trending upward. This upward trend is expected to continue in the coming quarters with favorable financial results. Comparable store scripts are also trending upward and are expected to continue increasing in the coming quarters.

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Source: Company investor presentation

Target Price

The consensus estimate of 21 brokers shows that WAG is undervalued based on its current price level. The mean target price is $77.74 presenting about 8% upside. The median target price is $82 that presents an upward potential of 14% on the current price level. The most optimistic valuation expects an upside of 30% and the most conservative estimate offers a down side of -58%. The range of estimates is very wide indicating a wide division in analysts' opinions.

Source: Yahoo Finance

Relative Valuation

The price to earnings ratio is very high at 21.53and is much higher compared to the industry P/E of 5.65 and the S&P 500 P/E of 8.53. After the incorporation of growth into the P/E estimate, the PEG ratio reveals that WAG's share is undervalued compared to the sector and S&P 500.

Source: Yahoo Finance

Conclusion

A look at WAG's past financial performance over the decade show that the company is a consistent performer with stable business. Walgreen's improving performance tells us about the operating efficiencies that the company possesses. The company rewarded its shareholders with growing dividends and its growth plans are likely to provide good growth to the top and bottom lines. WAG has already produced a 27% price return year to date and its one year return is fantastic at 42%. Analysis of the valuation based on the consensus target price and price multiples suggest that it is still undervalued at its current price.

Source: Walgreen Is Still A Decent Call