Drugstore chains are good businesses these days. While front-of-store margins are basement-level, the prescription-selling portion is a moneymaker, especially when patented drugs are shifting to the generic market. Walgreen (NYSE: WAG ) is no exception. The company, though already a giant, has significantly grown its earnings and reached record sales. Even better, the forecast for coming quarters looks strong as more drugs go off patent. For existing investors, this is a no-brainer -- it'd be wise to hold on to it. For those on the sidelines, the stock's more than 50% gain in the last year may look enticing -- but these investors need to know the value they are receiving for the price.
Ten days ago, Walgreen reported some strong numbers for the company's fiscal 2014 first quarter. Top-line sales hit a record $18.3 billion on the back of a 2.4% jump in same-store sales and market share gains in the prescription drug arena. Walgreen stores now represent just under 20% of that drug market.
Even though the company grew sales and increased its store footprint, costs rose a very mild 0.4%. Margins took a minor hit, but that was largely due to a cyclical factor. The patent cliff comes in peaks and troughs -- this past quarter was a trough, meaning that the higher-margin generic drugs weren't as prevalent a player.
The bottom line grew slightly more than 24% to an adjusted $688 million, or $0.72 per share.
In a multibillion-dollar deal, Walgreen acquired Alliance Boots -- the U.K.'s biggest drugstore chain -- starting in late 2012. In the past quarter, synergies between the two amounted to a cost savings of $107 million. Alliance contributed approximately $0.14 per share to earnings.
Mr. Market loves Walgreen and its peer CVS Caremark. With the drug business as an anchor, the companies are expanding their daily-needs segments and gaining customer traffic. For current investors, this is great. But prospective buyers should keep in mind that much of the predicted growth is baked into the stock price.
Walgreen trades at more than 20 times its trailing earnings and 15 times its estimated forward earnings. On an EV/EBITDA basis, the company trades at 11.76 times. CVS, by comparison, trades relatively in line on an earnings basis, but at only 9.76 times EV/EBITDA. The third-place player, Rite Aid, is the cheapest of the bunch on an EV/EBITDA basis at 8.02 times. Rite Aid has long had margins beneath its peers, but has seen improvement in recent periods.
Walgreen may not be on the shopping list of value-oriented investors, but it is a great company with terrific prospects. Those who are willing to pay a premium price for a premium company should take a close look -- just don't expect that 50% jump in stock price year after year.
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