After a rough couple of sessions thanks to worries that a retailing giant could begin flexing its muscles in the generic drug world, shares of Walgreen
Generic hysterics
First the scoop on generic worries. Late last week, stocks of the major drugstore chains -- including Walgreen, CVS
Recent results
Walgreen's results for the year included total sales growth of 12.3%, to $47.4 billion, while same-store sales grew 7.7% for the year. Drugstores report trends in their two primary sales platforms: prescriptions and "front end," or sales of on-the-go grocery and other basic consumer goods. Walgreen's comparable pharmacy sales grew 9.2% for the year, while front-end sales jumped 5.3%. The earnings press release detailed that prescription sales accounted for 64.3% of total sales and grew 13.3% overall for the year. Not bad indeed, continuing a trend of solid sales growth at the company.
Net earnings also advanced in the double digits, growing 12.3%. Diluted earnings advanced a slightly higher 13.2% to $1.72, due to fewer shares outstanding as the company repurchases its stock. Operating cash flow nearly doubled, but our Fool by Numbers pointed out that this was primarily due to a jump in accounts payable.
Looking forward
So what can we expect going forward? Pharmacy sales will likely continue to be the growth driver, as aging Americans will need more and more prescriptions filled. These sales carry lower profit margins than the front-end products, but drive customers into the stores to buy milk and smaller grocery items. Additionally, generic drugs are growing as name-brand drugs come off patent; this lowers overall sales, but drugstore chains reap higher profit margins from the generics.
In terms of store count, Walgreen operated nearly 5,500 as of this month and projects 7,000 stores by 2010. In other words, investors can count on at least four more years of expansion, while it is also very probable that domestic growth can continue unabated for another decade. International growth could prove more challenging, but that is always another avenue. I also recently detailed that Walgreen has formed its own pharmacy benefit manager (PBM) division to compete with other PBMs such as Caremark
The Foolish bottom line
As it stands now, Walgreen has the best growth track record and is the most profitable operator of the three major drugstore chains. CVS is the largest in terms of total store count, but is a close second in terms of sales per square foot and is a bit more acquisitive while pursuing growth. Rite Aid just got larger but has posted more uneven sales and profitability in its recent past. The stock trading multiples reflect this pecking order, as do the long-term stock charts of each firm.
Overall, Walgreen has a storied history of prolific cash-generation capabilities, which it duly reinvests back into growing its store base throughout the U.S. Over the past five years, sales have grown 14% each year on average, while diluted earnings have grown 13.6% over that time frame.
The stock is not cheap, trading at about 29 times trailing earnings. The last time it traded at less than 20 times earnings was back in 1994. If growth continues at a double-digit clip, then paying up for this growth company may pay off; a key ingredient is a long-term bias, just in case earnings growth needs some time to catch up to the rich multiple.
For related Foolishness:
Wal-Mart is an Inside Value pick. UnitedHealth is both an Inside Value and aStock Advisorselection.
Fool contributor Ryan Fuhrmann is long shares of Walgreen but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
