Walgreen: Few Short Term Triggers But An Excellent Long Term Investment

| About: Walgreens Boots (WBA)

Shares of Walgreen (WAG) ended Friday's trading session with modest losses of 0.4%. Before the market open, the drug store operator announced its fourth quarter results.

Fourth Quarter Results

Walgreen reported fourth quarter revenues of $17.1 billion, down 5.0% on the year. Revenues came in line with analysts expectations.

Walgreen reported adjusted net earnings of $599 million, or $0.66 per share. Adjusted earnings, beat analysts consensus of $0.55 per share. Adjusted earnings exclude the negative impact of $0.09 related to the transaction with Alliance Boots. The impact from leaving the Express Scripts network impacted earnings by $0.06 during the quarter.

The company reported a 55% drop in fourth quarter net income to $353 million, or $0.39 per share. This compares to last year's earnings of $0.87 per share.

Full year revenues fell by 0.8% to $71.6 billion. On average, analysts estimate that leaving the Express Script network cost Walgreen some $4 billion in annual revenues. Net earnings fell 21.6% to $2.1 billion, or $2.42 per diluted share. Adjusted net earnings per share came in unchanged at $2.93. Adjusted earnings exclude the impact of Walgreen leaving Express Scripts and the one-time costs associated with the investment in Alliance Boots. Operating cash flows rose 21.6% to $4.4 billion.

CEO Greg Wasson commented on the results,

This was a challenging, but very important year for Walgreen, and we finished with a tough quarter. While we controlled costs and generated strong cash flows in the fourth quarter, our performance also reflected a strategic shift in promotional spending, a continued economically challenged customer, and the impact from Express Scripts. Entering the new fiscal year, we believe we are positioned for growth as we benefit from the launch of our Balance Rewards loyalty program, our re-entry into the Express Scripts pharmacy provider network and our execution of the Alliance Boots strategic partnership.


Walgreen ended its fourth quarter with $1.3 billion in cash and equivalents. The company operates with $5.4 billion in short and long term debt, after the $4 billion cash investment in Alliance Boots, for a net debt position of $4.1 billion.

Currently, the market values Walgreen at $31.3 billion. This values Walgreen at 0.4 times 2012s annual revenues and 15 times annual earnings. The valuation compares to a revenue multiple of 0.6 times for CVS Caremark (CVS), which trades at 17 times annual earnings.

Currently, Walgreen pays a quarterly dividend of $0.275 per share, for an annual dividend yield of 3.0%.

Investment Thesis

Year to date, shares of Walgreen have risen some 10%. Shares started the year around $34 in January, and fell to lows of $30 during the summer months after Walgreen announced to make a large investment in Alliance Boots. Shares recovered to $36 in recent weeks, after Walgreen and Express Scripts settled their pricing dispute, to get prescriptions filled again at Walgreens stores.

Over the past five years, shares have lost roughly a quarter of their value. Shares moved in a wide $20-$45 trading range over the time period. Between 2009 and 2012, Walgreen grew its annual revenues from $63.3 billion to $71.6 billion. Net income remained largely unchanged around $2.1 billion. Earnings per share rose from $2.02 in 2009 to $2.42 in 2012, as the company repurchased roughly 10% of its shares outstanding over the period.

Investors look with greater confidence towards the future again after the company and Express Scripts settled their dispute. Furthermore, investors grow more confident with Walgreen's partial acquisition of Alliance Boots, as the situation in Europe has stabilized for now.

Looking ahead of 2013, Walgreen should be able to improve its net earnings, now it joins the Express Scripts network again. Walgreen should be able to close the gap between net earnings and adjusted net earnings, coming in at almost $3 per share.

This values Walgreen as 12 times adjusted annual earnings, while the company pays a dividend yield of 3.0%, making it rather interesting for long term shareholders. Don't expect spectacular returns in the short term tough, as shares already advanced 25% in recent months.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.