“Take a look with Walgreen, surging in the pre-market and Walgreens looking good. And Walgreens touted with the numbers topping estimates and also getting a lot of credit for changing their makeup. They’re not focusing on the nonessentials, it’s tough times, tough economy, instead they’ve been focusing on the essentials that you need every day. Milk, bread, soap, that’s what they’ve been focusing on and boosting the prescription drug sales and Walgreens looking good and you can see it.”– FBN’s The Opening Bell 9/29/2009
Walgreen (NYSE:WAG), the stock of the largest drug store chain in the U.S., is surging to new 52-week highs after reporting a quarter that was much better than anticipated. The company reported earnings of 44 cents per share, or a nickel better than Wall Street estimates. Walgreens benefited from its strategy of focusing on essentials and sprucing up stores by reducing clutter allowing the top line to rise by 7.6% to $15.7 billion, which was slightly better than expected. The shift in inventory priorities came at the right time as consumers are generally only buying what they need as saving rates rise.
Sales gains were better than expected, but it was the pharmacy division that really outperformed. General merchandise same store sales were higher by 1.4%, but same store sales for the pharmacy were 4.5% better. Also today, Walgreens introduced a new program in hopes to grab an even bigger slice of this market with a program allowing customers to pick up 90-day prescriptions as an alternative to mail order programs.
Perhaps the most impressive piece of the company’s quarter was management’s continued ability to lower costs. Their stated goal was to achieve $1 billion of pretax cost savings by 2011, and at this point they are on track. They have slowed store openings and lowered the headcount among other changes to the cost structure. Ironically, Walgreens said that the cost-cutting efforts cost the company 3 cents per share in the latest quarter, but the transformation realized 7 cents per share of savings.
At Ockham, we are big fans of Walgreens from a value perspective, which is why we have it rated Greatly Undervalued. It was one of the stocks we selected for a feature in Forbes, “5 Blue Chips Fit for Ben Graham“. Among our reasons for selecting Walgreens were the strong balance sheet, consistent growth in dividends, and obviously the valuation. Walgreens looks extremely undervalued when compared to historical norms on a price-to-sales or price-to-cash earnings basis. Furthermore, the company is growing sales and cutting costs, which is a great formula for future performance.
Even after the stock’s 10% gain on the day, we still think that there is further appreciation potential for the long term investor, although investors may want to wait to buy on a dip. We are far more positive on WAG than any of its competitors.