Walgreen Is on a Roll...but Can It Last?

Source: Wikimedia Commons

June has been a good time to own shares of Walgreen (NYSE: WAG  ) . In the first four trading days of the month, shares of the country's second-largest drugstore operator jumped more than 5% from $71.91 to $75.60. While the S&P 500 index also saw upward movement during this period as investors continue to become more confident in the state of the economy, Walgreen's rise has been attributed to strong sales for the month of May.

In spite of this increase in share price and in light of better operating results, is now the time to be considering jumping into a position in the company? Or would the Foolish investor be better off picking up shares in Rite Aid (NYSE: RAD  ) or CVS Caremark (NYSE: CVS  ) ?

Walgreen is still growing rapidly!
For the month of May, Walgreen reported that sales increased by 6% to $6.57 billion from the $6.19 billion the company reported for the same month in 2013. According to the company's press release, its sales jump was driven, in part, by a 1.5% rise in drugstore count from 8,096 locations last May to 8,216 this year. However, the biggest jump in revenue seems to have come from rising comparable-store sales.

During the month, Walgreen reported that comparable-store sales increased 4.4%. This came in spite of a 1.3% negative impact from calendar day shifts and a 0.8% hit stemming from new generic-drug introductions. The biggest contributor to these strong results was the company's comparable-pharmacy sales, which jumped 5.5%. Front-end comparable-store sales also did well, increasing by 3% as a 3.1% improvement in basket size was offset by a 0.5% reduction in customer traffic.

Source: Walgreen

For its third quarter ended on May 31, total revenue climbed more than 6% from $18.3 billion to $19.5 billion. Similar to May, Walgreen attributed its strong quarterly results to a 5.1% improvement in comparable-store sales as a 6.8% rise in pharmacy comparable-store sales helped the business out immensely.

But is there a better growth play than Walgreen?
The past few years have been kind to Walgreen. Between 2009 and 2013, the company's revenue rose 14% from $63.3 billion to $72.2 billion. The main driver behind its higher sales has been a 14.5% rise in store count from 7,496 locations to 8,582. However, the company's aggregate comparable-store sales increase of 2% also played a role in its performance.

WAG Revenue (Annual) Chart

Walgreen revenue (annual) data by YCharts

During this same five-year period, Walgreen outperformed Rite Aid by a mile. Although the company's net loss of $506.7 million turned into a net gain of $249.4 million through cost-cutting initiatives, this came at the cost of lower sales. Between 2009 and 2013, Rite Aid's revenue fell 0.6% from $25.7 billion to $25.5 billion as a 4% reduction in store count was partially offset by an 0.8% improvement in aggregate comparable-store sales.

While Walgreen's revenue growth trounced Rite Aid's, the company could not keep pace with larger rival CVS. Over the past five years, CVS saw its revenue climb a jaw-dropping 29% from $98.2 billion to $126.8 billion. This growth was driven, in part, by an 8% jump in store count from 7,095 locations to 7,660, but the main contributor to the company's success has been its comparable-store sales, which saw an 18% aggregate increase.

Foolish takeaway
Based on the data provided, it's clear that Walgreen has done very well for itself, not just over the past month but over the long run as well. While there is no guarantee that the business will continue this upward trend, evidence suggests that  its future looks brighter than ever. Rather, it's likely that the company's increase in sales will continue but not at the rate that CVS has managed to do.

Source: Wikimedia Commons

The only downside to the company, however, is the price investors have to pay for it. Using the forecast profits for this fiscal year, shareholders are paying a hefty 22 times earnings for the business. This is steeper than Rite Aid's 20 times, as the company moves more and more into profitability, and the 18 times earnings that CVS is trading for. For this reason alone, shareholders should think very carefully before buying Walgreen's stock, as both Rite Aid and CVS might turn out to be more sensible investments given their discount to Walgreen.

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