Has Walgreen Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Walgreen (NYSE: WAG  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Walgreen.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

5.9%

Fail

 

1-Year Revenue Growth > 12%

(0.8%)

Fail

Margins

Gross Margin >
35%

28.4%

Fail

 

Net Margin > 15%

3%

Fail

Balance Sheet

Debt to Equity < 50%

29.6%

Pass

 

Current Ratio > 1.3

1.23

Fail

Opportunities

Return on Equity > 15%

12.9%

Fail

Valuation

Normalized P/E < 20

13.69

Pass

Dividends

Current Yield > 2%

3.3%

Pass

 

5-Year Dividend Growth > 10%

23.7%

Pass

       
 

Total Score

 

4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Walgreen last year, the company has given back both of the points it earned from 2010 to 2011. The stock has also struggled, eking out a small gain over the past year despite spending much of 2012 at lower levels.

Walgreen does battle in the pharmacy retail space with archrival CVS Caremark (NYSE: CVS  ) as well as perennial odd-company-out Rite Aid (NYSE: RAD  ) . Much of the past year has focused on Walgreen's long dispute with Express Scripts (Nasdaq: ESRX  ) , which spent months before finally agreeing to a deal that would allow customers served by Express Scripts to use Walgreen as their pharmacy.

Yet even after a new Express Scripts deal, Walgreen is still facing fallout. In its most recent quarterly reports, Walgreen suffered lower same-store sales, while CVS posted much better than expected numbers, with sales rising to record levels and a big jump in earnings. Most important, CVS now expects to retain 60% of the customers it gained from Walgreen during the Express Scripts lockout. Even Rite Aid has managed to pick up some of Walgreen's old customers, although it may not do such a good job holding on to them. Regardless, when you combine that news with Express Scripts' own woes, it's clear that Walgreen will face a tough time getting back into growth mode.

One potential source of additional business will come from health care reform. Walgreen is already among preferred pharmacy networks for major Medicare insurers including UnitedHealth (NYSE: UNH  ) and Humana, and if insurers get more business from younger workers due to the individual mandate provisions of the Affordable Care Act, then Walgreen could potentially reap rewards from its relationships with insurers.

Still, for Walgreen to improve, it really needs to strike back at CVS and get its customers back. Otherwise, the Express Scripts fiasco could prevent the company from ever reaching perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

The best investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Click here to add Walgreen to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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