Walgreen Finally Gets It Right

Jul.19.12 | About: Walgreens Boots (WBA)

Long suffering investors in Walgreen (WAG) got some great news this morning when the company it announced it has patched things up with Express Scripts (ESRX) and the companies have agreed to a long term deal. I have been advocating for picking up Walgreen at a substantial discount over the past couple of months based on valuation and the high probability that a deal with Express Scripts would eventually be reached. The stock should pop today, but looks to be a solid value going forward given the uncertainty that was just removed from its shares.

6 reasons WAG is still a solid pick at under $35 a share:

  1. The stock yields significantly above 3% and the company has raised its dividend at a better than a 20% annual clip over the past five years.
  2. Now that the problems with Express Scripts have been resolved, I would look for a rash of upgrades from analysts which should buoy the stock.
  3. The stock is priced at the bottom of its five year valuation range based on P/B, P/E, P/S, and P/CF.
  4. Consensus earnings estimates for FY2013 had already been revised up 2% over the past month. Look for estimates to be moved up substantially in next few weeks to take into account the new deal with Express Scripts.
  5. The stock is cheap at just over 7 times operating cash flow and the stock's five year projected PEG should move back down to 1 after revenues from Express Scripts are factored back in.
  6. Prior the announcement, Walgreen's shares already looked like they found a bottom and recently crossed its 50 day moving average (see chart).

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Disclosure: I am long WAG.