Seeking Alpha
Profile| Send Message| ()  

Walgreen (WAG) is going through a rough spot caused by ex-counterparties opting to take their business elsewhere. Investors need to determine if Walgreen is attractively priced relative to its peers.

American Demographics: The Case for Pharmacy

Americans are getting older, fatter, and increasingly medicated. Our population is aging, and as people get older they buy more medication. This is very bullish for pharmacy companies. The increasing incidence of American obesity is also bullish for pharmacies because overweight Americans have more health problems which require them to consume more prescription medications. Another less-discussed trend in American society is the increasing use of medications in general. It is not politically correct to notice that more people are on ADHD medication, but it can't be ignored as a revenue stream. More and more ailments and disorders that were considered part of the human condition are now being medicated. This is good for the top line of pharmacy stocks.

Today's Walgreen Problems

Walgreen stock dropped almost two percent when numbers from the quarter ending in August were announced. Quarterly sales of the largest US pharmacy retail chain were down 4.9% to $17.1 billion. The steep fall in stock price is believed to be an outcome of lower sales compared to its competitor Wal-Mart (WMT) and CVS Caremark (CVS) due to a delay in renewal of the service agreement with Express Scripts customers which caused comparable store prescription sales to drop by 11 percent while monthly sales for August declined by almost 8 percent. Expiration of the Tricare contract added fuel to fire as the military personnel and military dependents health plan manager refused Walgreen an extension in December 2012.

John Heinbockel of Guggenheim securities had Walgreen stock rated as a buy. He wrote, "We had assumed that Walgreen would be in this plan and that it would recover 50 percent of the lost business."

Checking for Value

Analysts can ask when a Walgreen turnaround may happen while investors can ask a much simpler question: how much of a discount am I getting for current problems at the company?

When compared to other retail stores with pharmacies, Walgreen trades at an attractive valuation and could be a good pick for value investors:

Ticker

Company

Industry

P/E

P/S

P/B

CVS

CVS Caremark

Drug Stores

17.11

0.53

1.62

KR

The Kroger

Grocery Stores

21.8

0.13

3.27

RAD

Rite Aid

Drug Stores

NA

0.04

NA

SWY

Safeway

Grocery Stores

8.7

0.09

1.49

WAG

Walgreen

Drug Stores

12.57

0.43

2.08

WMT

Wal-Mart Stores

Discount, Variety Stores

15.54

0.54

3.54

Rite Aid may trade at a lower price-to-sales ratio, but it is currently unprofitable and it has negative equity on its books. In the long-term the returns to negative equity have dramatically underperformed shares with positive net assets on their books. Safeway and Kroger offer attractive price-to-sales ratios as well, and Safeway also offers an attractive price-to-earnings ratio.

Once dividend yield and long-term growth are taken into consideration, Walgreen looks even more attractive:

Company

Div Yield

Payout Ratio

Past 5 years EPS Growth

5 Years Analyst EPS Growth

Past 5 Years Sales Growth

CVS Caremark

1.34%

19.99%

10.14%

12.69%

19.57%

The Kroger

2.55%

42.10%

-8.15%

9.28%

6.45%

Rite Aid

-75.75%

8.00%

8.47%

Safeway

4.35%

31.30%

-5.02%

9.41%

1.66%

Walgreen

3.02%

30.55%

11.32%

12.03%

8.77%

Wal-Mart Stores

2.15%

31.86%

9.19%

8.79%

5.11%

For earnings CVS and Walgreen are rivals for the top of this list, though CVS trades at a 50% higher price-to-earnings multiple. Safeway and Kroger have both seen earnings declines and lower sales growth than Walgreen. Thus, Walgreen has better growth prospects in the long-term than Safeway or Kroger.

Walgreen also pays an attractive 3.02% dividend with a sustainable 0.306 payout ratio. This should attract investors because it shows that the firm's management is willing to return capital to its owners.

Conclusion

At low valuations and with excellent long-term growth prospects, Walgreen is currently a great way to gain exposure the demographic trends driving healthcare in the United States.

Please read the article disclaimer.

Source: Walgreen: Today's Pain Is Tomorrow's Gain For Long-Term Investors