Shares of Walgreen (WAG) closed the day up 1.2% in a general market environment which saw some selling pressure near the end of the trading day. The consumer goods and pharmacy company reported slightly better second quarter results before the market opened.
Second quarter results
Walgreen reported an 8% decline in its second quarter net profit to $683 million. Earnings per share came in at $0.78 beating analyst consensus by one cent.
Sales increased 0.8% on the year to $18.7 billion. Comparable store sales growth of 2.1% has been driven by an increase in purchases (+1.4%) as well as an increase in store traffic (+0.7%).
Earnings fell after Walgreen ended its contract with pharmacy-benefit manager Express Scripts (ESRX) at December 31th and there was a mild cold flu season. The impact on the fiscal second quarter earnings per share was $0.07 and $0.03 respectively.
Despite these negative impacts, the company managed to beat consensus by one cent and analysts applaud the willingness to cancel the contract with Express Scripts as it demonstrates the long term view of the company.
Furthermore, Express Scripts seems to be harder hit than Walgreen itself by missing out on the contract. Express Scripts reiterates its willingness to talk to Walgreen about renewing the relationships as Express missed its earnings target for the fourth quarter. Walgreen continues to honor its contract with Medco Health Solutions (MHS) which agreed to be acquired by Express Scripts.
According to Walgreen's CEO Wasson the company continues to make progress with its "well at Walgreen" strategy in order to be American's choice for health and daily living products.
For the first half of its fiscal year 2012 the company earned $1.41 per share (including the 10 cent charges related to end of the Express Scripts contracts and a mild flue season). At this rate the company is on track to generate roughly $75 billion in revenue this year and earn $3.00 per share.
The company has been steadily repurchasing its own shares, thereby reducing its s outstanding from about 1 billion in 2008 to 885 million at its latest quarterly filing. With a market valuation of about $30 billion, shares are valued at mere 0.4 times annual revenues and 11 times earnings. The company holds about $1.4 billion in net debt as the company has a $1 billion cash position. Shareholders receive a $0.22 quarterly dividend, which provides an annual dividend yield of 2.6%
Main competitor CVS trades at 0.56 times annual revenue vs. a 0.42 times annual revenue multiple for Walgreen. CVS reports a net profit margin of 3.3% and trades at 17 times earnings. Walgreen reported a higher net margin of 3.8% but trades at a mere 11 times earnings.
Both companies have seen similar growth rates in revenue and profits over the last couple of years and have focused on returning cash to shareholders by repurchasing a significant portion of outstanding shares. Year to date shares in Walgreen have returned a mere 5% vs. 12% for CVS.
Shares of Walgreen seem to be relatively attractively valued at this moment and trade at a notable 30% discount to its main competitor CVS (on an earnings and revenue multiple) which has a stronger focus on pharmacy items. Walgreen is a true value play and its shareholder creating strategy by repurchasing fairly valued shares in combination with strong operational results (notably cost control) is a driver for future returns.
I am a long term holder of the stock.