Wal-Mart, Walgreen and Dollar General: What Should You Buy?

Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Walgreen (NYSE: WAG) reported a fairly solid quarter. When compared to other retail opportunities, this company possesses something that may not be found elsewhere.

Earnings highlights and analysis

The company reported $17.7 billion in sales for the quarter. The company grew sales by 3.2%. The company reported 22.9% year-over-year growth in operating income. It also came out with 29.3% year-over-year growth in adjusted net earnings. The company’s adjusted diluted EPS grew by an astounding 18.1% year-over-year in the quarter.

Walgreen was able to grow sales by a modest amount, but with better management of cost the company was able to generate the significant improvements in earnings. The company has a net profit margin of 2.9%, and could see a lot of improvements in net income, with a slight improvement on margins.

The company reported $0.85 in earnings per share for the quarter. Its performance missed analyst expectations. However, if investors are willing to wait, the future could be bright for this company. Walgreen plans on growing revenue by 80.5%, and operating income by 131%, through 2016. The company hopes to do this by rapidly increasing the number of stores it currently operates. It plans to borrow money in order to grow its business.

The company currently has $5.3 billion in debt, but plans to increase that debt to $11 billion in order to sustain higher rates of growth. Because the company has a working business model, I believe that this strategy of borrowing and opening stores will be a success.

Walgreen currently trades at a 14.8 earnings multiple. The multiple is reasonable when considering the 20% to 25% growth rate the company is projecting. Also, Walgreen pays out investors a 2.5% dividend yield, giving income-oriented investors a compelling investment opportunity. Growth-oriented investors could meet a doubling goal by five years. Value investors would be buying this company at a discount relative to growth. Overall, Walgreen is a compelling investment opportunity despite the slight miss on earnings.

Retail at a larger scale

Investors should also consider Wal-Mart Stores (NYSE: WMT). The company’s every-day-low-pricing business model will continue to reap rewards for investors over time. The company is expanding its store footprint internationally. Procter & Gamble is projecting the middle class to grow by 1.4 billion people, and of that 98% will come from emerging markets. Wal-Mart’s international segment isn’t the most profitable, but given enough time this will be the company’s segment that will log the upside surprise.

Analysts on a consensus basis anticipate the company to grow earnings by 9.3% on average over the next five years. Wal-Mart trades at a 14.8 earnings multiple and generates a 2.5% dividend yield. The stock trades at a reasonable valuation, because of the historical consistency in the company’s earnings performance.

We can work with discounts too

The Dollar General (NYSE: DG) has been able to run its every-day-low-pricing scheme successfully and is effective at generating a consistent stream of customers in its retail locations. The company plans to expend $575 million to $625 million in capital expenditures in 2013. Almost 50% of the capital spending is on investments in store growth and development. Another 30% is for distribution, transportation, and special projects. The remaining 20% of capital expenditure spending is for maintenance.

Dollar General operates a working business model and has plans of improving the overall shopping experience of being at one of its stores. The company trades at a 17.7 earnings multiple, which is a little pricey. But the company makes up for it with analysts on a consensus projecting the company to grow earnings by 15.4% on average over the next five years. The company’s earnings growth is reasonable when considering the historical consistency of the company’s growth.

Conclusion

Going forward Walgreen has the potential of being one of the most lucrative investment opportunities in the retail sector. The company plans on using leverage to grow sales and net income. While some people find that unappealing, I find it thoughtful and lucrative because the company has a successful track record of running and operating stores.

That being the case, Dollar General is another compelling investment opportunity. Dollar General isn’t projected to grow as fast as Walgreen; on the other hand, the company has been paying down its total long-term debt, which is why the company has a lower growth rate when compared to Walgreen.

If Walgreen and Dollar General sound a little too risky, fear not, we can always fall back on Wal-Mart.

Looking for ways to diversify into dividend-paying stocks? The Motley Fool's special report "Secure Your Future With 9 Rock-Solid Dividend Stocks" is a great way to kick-start your search. Just click here to get your free copy today.


Alexander Cho has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure