Walgreen: Reevaluating The Bullish Case In Light Of The Express Scripts Deal

Jul.19.12 | About: Walgreens Boots (WBA)

With today's announcement of a deal between Express Scripts (ESRX) and Walgreen (WAG), I have decided to reevaluate my bullish thesis for WAG. In this article I will evaluate the long term implications of the deal and WAG potential growth going forward.

Chart courtesy of Bigcharts.com

The most immediate implication of this deal will be the removal of the uncertainty that clouded WAG long term outlook. As we can see from the chart above the equity was trading at roughly $42 per share before the announcement that they would be exiting the ESRX network. WAG immediately sold off and failed to regain its footing. WAG has suffered negative same store prescription volumes since January when they exited the ESRX network. With this new deal WAG should be able to recoup a significant amount of the lost business via promotions to entice shoppers back. Front end sales managed to hold up quite well during this trying time, which indicates to me that shoppers still frequented the store. Managements challenge now is to convert the foot traffic into prescription customers. I believe that they are up to the task and expect to see positive results in the next two months.

The new deal further demonstrates the importance of WAG in a nationwide pharmacy network. While the uncertainty of whether they would permanently remain out of the ESRX contract, WAG very methodically has managed to further strengthen their presence in the pharmacy field via the acquisition Bioscript and USA drugs. These purchases have allowed WAG to increase their geographic presence in an area they were underrepresented and to expand further into specialty drugs. By making these purchases WAG made it very difficult for them to be excluded from a nationwide provider network. These deals also expand their sales and profit making potential.

Going forward WAG has managed to expand internationally via the Alliance Boots deal which I wrote about here. The international expansion will allow WAG to enter the European market which should further broaden their revenue base and negotiating power with the large pharmaceutical manufacturers. The international expansion coupled with the US purchase should drive revenue growth for the next few years. When coupled with the 28 per share dividend (over 3%) these factors make WAG in my opinion a compelling value. I believe that the equity is well suited for the investor that is seeking a stable growing dividend with the potential for capital gains.

Disclosure: I am long WAG.

Additional disclosure: The above mentioned article is for informational purposes only. Thank you for reading and I look forward to your comments.