Walgreens (WAG) is on a relief rally today, having finally settled its spat with ExpressScripts (NASDAQ:ESRX).
But what the traders don't know is there remains damage to get through before investors should look for an entry point into the stock.
- Walgreens won't be taking EspressScripts prescriptions until October.
- The third quarter results will be ExpressScripts free.
- It will take time for Walgreens to win back the business it lost to the dispute.
The deal does mean you can start evaluating Walgreens from a fundamental perspective again. And the purchase of Alliance and Boots, which I wrote about last month, now becomes an important part of that analysis. Over the longer run this could become a drag on earnings, and on the multiple you should be willing to pay for Walgreens stock.
It's also important to note, again, what a drug store is and is becoming. What are people doing, and how much are they spending, while waiting for that prescription to be filled? How much money can you make from that time?
An increasing number of general merchants are grabbing this time for full-on shopping. It may take a half-hour or more for Wal-Mart (NYSE:WMT), Costco (NASDAQ:COST) or Kroger (KG) to fill a prescription. They expect you to spend that time buying other things, and that's where the profit is.
For Walgreen, as for CVS Caremark (NYSE:CVS), the key will be selling services alongside drugs. The stores are smaller than those of their big box rivals. So clinics and other wellness services, even coffee and wine bars, are where they're hoping to get people to spend that time.
Walgreens is just starting to re-work its stores for this new era. Beyond its MinuteClinic, CVS is going to maintain a standard drug store look. If you have a three-to-five year investment horizon, it's on this that you should evaluate the two stocks. Can WAG take share from CVS, which has its own pharmacy benefit manager, or PBM, unit and never got shut-out by ExpressScripts, with its new store design? What about mail-order sales, done directly through insurers or PBMs? Will they grab share as people decide they don't want to spend any time at all getting drugs?
I think this can work because of health reform.
What we've seen in the case of Massachusetts is a growing shortage of primary care physicians. That's because primary care is guaranteed in health reform, but primary care doctors aren't guaranteed more money, and with many retiring (and few choosing it) the national shortage is going to get acute.
In that environment clinics like those of Walgreens, and of CVS, become important. They're staffed by nurse practitioners and physicians' assistants, connected through technology to doctors who can answer complicated questions, and make recommendations. There are certain to be enormous profit opportunities in being this point of primary care, and enormous primary care market share to be gained.
That's the Massachusetts experience, anyway, and I'm guessing it will become a national trend. So you want to be in on it. Look to get into WAG as soon as the downside of the next few months becomes obvious and the traders back off the stock. And keep it.
Disclosure: I am long COST.