Walgreen is Still Too Expensive

Includes: CVS, TGT, WBA, WMT
by: Eddy Elfenbein

Eddy Elfenbein submits: Shares of Walgreen (WAG) are getting nailed today as the company reported earnings of 41 cents a share, which was in line with Wall Street's estimate (see the earnings call transcript). But judging from today's price action, I think it's safe to say that someone out there was expecting a little more. Even though the stock is down on in line earnings, I'm still taking a pass on Walgreen.

With the latest earnings, Walgreen's price/earnings ratio falls to about 26. CVS (NYSE:CVS), on the other hand, is trading at 19 times earnings. No matter how you slice it, I just don't see how Walgreen can justify a 36% valuation premium, (not that I like CVS either).

Both companies face a new challenge--Wal-Mart (NYSE:WMT). The Beast from Arkansas announced that it will now start selling generic drugs. Wal-Mart is legendary for beating the competition in any new market it enters. Actually, "beating" is a rather kind word. Wal-Mart thoroughly annihilates the competition. Then dances on their grave.

The company is starting small and only focusing on the Tampa Bay market. But if it goes well, Wal-Mart could expand the program. This is a very profitable sector; Walgreen's stock is up around 600-fold in the last 32 years. Also, in addition to Wal-Mart, competitors like Target (NYSE:TGT) could jump in. This won't have much of a short-term impact on either CVS or Walgreen, but it's another risk factor weighing on both stocks.

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