Walgreen: Attractive Valuation and Growth Story

Feb. 8.08 | About: Walgreens Boots (WBA)

I purchased shares of Walgreen Co. (WAG) because it screens well in my factor model and it looks even better after a detailed review.

Some key metrics from my factor model include attractive margins (WAG has better gross (28.28%) and operating (5.84%) margins than their industry (25.25 and 3.51, respectively), and they beat major competitors (CVS and Rite Aid) in most categories. Price/Earnings ratio (17.54) is better than CVS, Rite Aid, and the industry. Walgreens had a positive earnings surprise in 3 of the last 4 quarters, and earnings has increased every year for the last five (14% annual growth rate). Price/Earnings/Growth (NYSE:PEG) ratio is 1.17, which is very attractive for a company with an aggressive growth schedule like Walgreens. Also, WAG has low debt and extra cash on their balance sheet that will be used to fuel growth (no share buybacks planned).

A detailed review of WAG reveals a strategy dedicated to growth. Management is committed to 8% annual store growth in 2008 (550 new stores, net increase of 475 stores), and expects 600 new stores in 2009. Management thinks the US can support 13,000 Walgreens stores (at 8% they won't reach this number this decade, which means years of projected growth).

Management is also committed to adding more high value products and services such as DHL services, ink cartridge refills, and others. Walgreens also intends to extend pharmacy offerings. WAG is in the specialty pharmacy market which is growing at 20% per year, versus traditional retail pharmacy which is only growing at 8% per year.

Overall, Walgreens has an attractive valuation and an attractive growth story.

Disclosure: Long WAG