Walgreen
Solomon's Select, by Mark Robertson, Managing Partner February 1st, 2012
A stormy relationship and breakup with Express Scripts isn't the first commercial storm faced by Walgreens.
Do you really think this is the first commercial storm faced by Walgreen? (The company was founded in 1901.) The current brouhaha revolves around the stormy relationship and breakup with Express Scripts. No one can deny the demographic potential but it’s fair to question the model and be vigilant about the competitive threats. Walgreen is a 3-time selection for this feature and the company has been selected on multiple occasions by the Manifest Round Table — generally following another disruptive speed bump that delivers a swoon in stock price.
Did you know? Walgreens invented the malted milkshake. Customers stood three and four deep around the soda fountain to buy the “double-rich chocolate malted milk.”
Heritage: A Champion of Convenience
Walgreens appears to be running more commercials focusing on the convenience aspect of their business. Most of us like shorter lines and parking spaces that are in the same zipcode as our destination.
“Walgreens provides the most convenient access to consumer goods and services, and pharmacy, health and wellness services, in America. The company has recorded 36 consecutive years of record sales.”
“Walgreens is taking steps to ensure the company’s continued success in the face of a weakening economy. We are transforming into a more efficient and customer-focused company, both for drugstore customers and for patients and payers seeking quality pharmacy, health and wellness services that are accessible and affordable.”
Growth, Profitability and Valuation
Value Line has a sales growth forecast of 8.5%. We’re using 6.8% based on analyst consensus forecasts and a regression from 2006-2015.
The net margin (2008-2012) checks in at 3.4%. Value Line has a 3-5 year projected net margin of 3.8%. We’re using 3.6% — a median for the span 2007-2015 that also seems consistent with the long-term characteristic of achieving 3.5% net margins — give or take a tenth of a percentage point from time to time. Competition is formidable and the system is pretty mature but well-positioned to serve a burgeoning demographic.
The long-term VL projected average P/E is 17×. Based on consensus and industry analysis, we’re assigning a projected average P/E of 15×.
Walgreen: Chronicle. Current levels of PAR are approaching the two peaks experienced since 2008. Value Line expects above-average appreciation potential over the 2014-2016 horizon despite the loss of the Express Scripts accounts. The company’s high quality rating, earnings stability and attractive yield make for a potentially suitable investment for patient, long term investors.
At a stock price of $33.22, the projected annual return is approximately 18%. The quality rating is 80.4 (Excellent) and the financial strength rating is 95 (A+).
The loss of the Express Scripts business is not without its challenges. And the strategic initiatives already in place to offset the lost business may fall short of expectations. All of that withstanding, the company continues to execute on most of the cylinders intact. Our outlook is relatively unchanged from the previous features back in November 2006 and May 2006. The relative returns on those two selections are -4.0% and -4.4% after temporarily posting much better returns before the recent price pause.
Do you remember how Wal-Mart was going to put Walgreen out of business back in 2006? They’re still working on it. Walgreen is working on proving them wrong. I trust they’ve got some good ideas and good customers. Convenient indeed.
Mark Robertson
Mark Robertson is founder and managing partner of Manifest Investing, a source for research and portfolio management focusing on strategic long term investors.