It's always dangerous for investors to assume that a good business will automatically make a good investment. (In behavioral finance, this is called representativeness.) As Walgreen
We don't have to look much further than the just reported first-quarter numbers to see that Walgreen remains a good business. Revenues increased 16.6% to $12.7 billion year over year, while diluted earnings per share increased 24.9% to $0.43 in the same period.
Walgreen was able to reinvest much of its operating cash flow, with capital expenditures funding the opening of another 143 stores for the quarter. The company plans to have a total net increase of 400 new stores for the year. Walgreen used its remaining cash flow to help repurchase 7.9 million shares for a total $343 million, wrapping up its $1 billion repurchase plan.
This ability to expand its business and repurchase shares without using any long-term debt shows the strength of Walgreen's business model. Management's ability to manage the company's cash flows and maintain a conservative balance sheet only adds to Walgreen's firm footing.
But does that good business translate into a good stock? With a streak of growing and profitable sales, it's hard to believe otherwise. However, stock prices are forward-looking, and there's increasing competition from the rebound of Rite Aid
Despite these headwinds, Walgreen doesn't seem priced for a slowdown. With an enterprise value of $45.5 billion -- roughly $17 billion greater than my estimates of invested capital, including capitalizing operating leases --there is plenty of future growth already priced into the shares. If you removed the estimated $16 in growth priced into each share, the price-to-earnings multiple would be closer to 16 times trailing-12-month earnings.
To me, that suggests that Walgreen's shares already reflect the strength of its business. If you're looking for an undervalued stock, one where the consensus isn't so rosy, this Fool prescribes looking elsewhere.
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