Shares of Walgreen (NYSE: WAG ) were all over the map last year. The company's fallout with pharmacy benefits manager Express Scripts (NASDAQ: ESRX ) , as well as increased competition from CVS Caremark (NYSE: CVS ) and Rite Aid (NYSE: RAD ) , left Walgreen in poor shape in 2012. However, 2013 is shaping up to be a moneymaking year for the country's largest drugstore chain. Let's take a closer look at what Walgreen has planned for the year ahead, and what catalysts are needed to push the stock into two-bagger territory.
A brief flashback
There's no denying that the past few years have been challenging for the drugstore chain. The company's messy breakup with PBM Express Scripts resulted in billions of lost revenue for Walgreen. In fact, before the dispute, Express Scripts accounted for about $5 billion in annual sales for the pharmacy retailer.
Express Scripts provides a variety of pharmacy services to its clients, including patient care and benefit management care. However, when Walgreen dropped its contract with Express Scripts, it subsequently slammed the door on tens of thousands of customers in the Express network. That's not all.
Rivals including CVS and Rite Aid jumped at the opportunity to steal customers away from Walgreen. As millions of customers left Walgreen for CVS and Rite Aid, so, too, did investors. However, to its credit, Walgreen ultimately settled the contract dispute with Express Scripts. In July, the two companies agreed on a new multiyear deal.
Just what the doctor ordered
Once Express Scripts welcomed Walgreen back into the family, the company began working every angle to win back lost pharmacy customers. However, it wasn't until January of this year that Walgreen's prescription volumes finally showed signs of a turnaround. "January prescription volume increased in the low double digits, which was above analyst expectations and followed months of declining prescription sales comparisons," Barron's reported.
This is particularly encouraging because prescription sales make up about two-thirds of Walgreen's total revenue, although Walgreen is hoping its acquisition of Alliance Boots will help boost future sales at the company. Walgreen coughed up $6.7 billion for a 45% stake in the European drugstore chain last year and will take on billions in debt to fund the cash-and-stock deal. Nevertheless, this decision carries both risks and opportunities for the company.
True, it isn't the best time to gain European exposure. However, the deal positions Walgreen for international growth in the years to come -- particularly thanks to Alliance Boots' position as the largest British drugstore chain, as well as the company's 3,300 stores across 25 countries. Shareholders will also be glad to know that Alliance Boots' executive chairman, Stefano Pessina, predicts double-digit earnings growth in the quarters to come, according to Barron's.
Meanwhile, Walgreen CEO Greg Wasson said the company's strategic partnership with Alliance Boots will allow it to establish "an unprecedented and efficient global platform." "As our two iconic brands come together, we will have a platform that will be very difficult, if not impossible, to replicate," he continued.
As the deal stands, Walgreen will also have the option to later acquire the remaining 55% interest in Alliance Boots. In addition to these global opportunities, Walgreen is expanding its scope of pharmacy services in the United States. Walgreen hopes to provide integrated health-care services that meet patients' needs and help drive down costs. One example is Walgreen's Take Care Clinics.
The clinics are open seven days a week at select Walgreen locations. Staffed by nurse practitioners, the Take Care clinics accept patients as walk-ins or appointments. This should help Walgreen capitalize on the aging population in this country. In-store health clinics, international growth opportunities, strategic partnerships, and its position as a market leader put Walgreen on pace for massive gains in the years ahead.
Up, up, and away
Getting back to the question on investors' minds: Can Walgreen's stock climb higher from here? I suspect it can, though it isn't going to happen overnight, or even over a couple of quarters. The company's investment in Alliance Boots will take time to play out, possibly years. That being said, the stock's current multiples look attractive for patient investors with a three- to five-year time horizon.
Ultimately, what it boils down to is execution. If the company can successfully implement its goals for the future, investors will undoubtedly see Walgreen's stock surge. Today the stock trades around $40 per share, though shares look cheap at just under 11 times fiscal 2014 earnings. In short, the stock has a real shot at being a multibagger if the company can successfully execute on its promises.
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