Is Everybody Underestimating Walgreen?

Source: Wikimedia Commons

After reporting sales results for the month of June on July 3, shares of Walgreen (NYSE: WAG  ) inched up 1% to close at $73.98. Despite the fact that management delivered strong metrics for the month, the modest rise in share price might have some investors thinking that the company's stock is fairly valued. Moving forward, does Walgreen have what it takes to prove Mr. Market wrong, or would it be better to take your money to Rite Aid (NYSE: RAD  ) or CVS Caremark (NYSE: CVS  ) instead?

Walgreen had a blowout month
For the month, Walgreen saw revenue come in at $6.28 billion. This represents an 8.9% increase compared to the $5.77 billion that management reported for the same month last year, and this has been somewhat attributed to the 1% increase in drugstore count from 8,098 locations in 2013 to 8,215 today. However, the biggest contributor to the company's top line growth appears to be its pharmacy operations.

Source: Walgreen

Compared to the same month last year, Walgreen saw its pharmacy sales rise an impressive 13.4%. This can be mostly chalked up to the 11.3% increase in comparable store sales the retailer saw. This was in turn due to a 7.3% improvement in prescription count. Front-end comparable-store sales also came in positive, rising 1.3% compared to 2013's results.

Can Walgreen keep the momentum up?
The past few years have been really good for Walgreen. Between 2009 and 2013, the company's revenue rose 14% from $63.3 billion to $72.2 billion as a higher store count and an improvement in aggregate comparable-store sales positively affected the retailer's operations. Although this growth pales in comparison to CVS's 29% growth rate from $98.2 billion to $126.7 billion, it significantly outpaced Rite Aid, whose top line ticked down from $25.7 billion to $25.5 billion.

WAG Revenue (Annual) Chart

WAG Revenue (Annual) data by YCharts

Moving forward, Walgreen has a lot of opportunities that should benefit it and its shareholders. On top of having a much larger presence than CVS and Rite Aid outside of the U.S. (the latter of which has no international presence), the company's relationship with Alliance Boots provides a huge catalyst for management to capitalize on. In 2012, Walgreen acquired 45% of Alliance Boots, a multi-national health and beauty group, for $6.5 billion. In the event that management still believes in its investment, it may acquire the remaining 55% of it during a six-month window in 2015 for $9.5 billion.

If it purchases the remainder of Alliance Boots (using 2013 sales metrics), Walgreen's revenue will soar from $72.2 billion to $110 billion. Unfortunately, this is still smaller than CVS. With a large amount of revenue coming from overseas, the company would be very well diversified.(Alliance Boots)

Another great opportunity that could send shares rising more is the enormity of its Balance Rewards program. As of the end of its most recent quarter, Walgreen boasted 81 million members under the plan. By enrolling as many people as possible, the retailer hopes to create a dedicated customer base and, in return, provides savings and the opportunity to be rewarded as a result of healthy life choices. In contrast, CVS had a slightly lower membership base at 70 million, while Rite Aid had a more modest 25 million member count.

Foolish takeaway
Based on Mr. Market's response to the news of a blowout month, it seems as though investors had already expected strong results from Walgreen and that management delivered within these expectations. While this could signal a short-term top for the company's shares, the Foolish investor would be wise to consider the strong performance the business has posted in recent years and the amazing catalysts that could propel its stock higher. For this reason alone, the Foolish investor would be foolish to discard Walgreen's prospects moving forward and should analyze the company in greater detail to see if its potential returns make it a bargain at this price.

Why worry about Walgreen?
Instead of buying into Walgreen, Rite Aid, or CVS, the Foolish investor might want to explore a more interesting health care idea. You see, the best investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not how we treat a common chronic illness, but potentially the entire health industry. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns you will need The Motley Fool's new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.


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