Walgreens Could Be Strong in 2013
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Several stocks' behavior after Walgreen (NYSE: WAG) and Express Scripts (NASDAQ: ESRX) announced their new agreement on July 19 gives some information about what investors think about the deal. Walgreen's stock price rose from around $31 on July 18 to roughly $36 today, and it seems like it's holding its gains. CVS (NYSE: CVS) fell from over $48 to below $45 today, while Express Scripts itself jumped up a bit on the 19th but is now slightly lower than it was on the 18th. Rite Aid (NYSE: RAD) sank even further after the deal, although it was already falling in early July.
Former Walgreen patients who visited CVS and Rite Aid stores earlier in the year could start shopping at Walgreen again. CVS and Rite Aid need to prevent these shoppers from going back. CVS has been very confident about its own performance expectations while observing Walgreen's troubles, and CVS even took another dig at Walgreen after the deal with Express Scripts was announced. On July 19 CVS announced that it thought it could keep half of Walgreen's former customers, and raised its guidance for the rest of the year by 5 cents.
Rite Aid seems like it might have more problems convincing Walgreen shoppers to stick around. On July 5, Rite Aid announced that its June same store sales figures were 1 percent weaker than last year, with pharmacy sales 1.6 percent weaker. Rite Aid might still have some time to come up with a new strategy, since Express and Walgreen won't start working together again until September, but CVS looks like it gained the most benefits from the dispute.
All three pharmacy chains have active Facebook presences, with company representatives rapidly responding to customer questions and complaints. By sheer number of Facebook fans, Walgreen looks like it comes out the winner by far, with more than 2 million likes. CVS has a million likes itself, but Walgreen is smaller than CVS, which makes Walgreen's likes figure stand out. Rite Aid has about 400,000 likes itself. Only Walgreen posts how many Facebook users have checked in at its stores, and Walgreen's own posts are receiving much more feedback from Facebook users than posts from either Rite Aid or CVS, which could mean that Walgreen understands social media better.
Facebook shows that many of Walgreen's shoppers have remained loyal, even though these customers will still have to wait a bit longer before they can pick up their prescriptions at Walgreen again. Express Scripts' most recent quarterly earnings were 18 percent weaker than last year, while Walgreen's quarterly earnings figure fell 11 percent, so the dispute has definitely hurt both companies' short-term results. It seems like Walgreen's earnings could show a hit next quarter as well.
CVS seems like it can still pick up an earnings boost next quarter, as it expects, although this boost does seem like it could be temporary. Walgreen looks like it has a good chance to attract some patients back in 2013, although attracting all of these patients back would be very challenging. Rite Aid's continuing weakness could provide a boost to both CVS and Walgreen, especially if Rite Aid has to shut down more stores in 2013. CVS and Walgreen currently have forward P/E ratios slightly above 12, with CVS' 1.14 PEG slightly below Walgreen's 1.22 PEG figure. The PEG comparison could tip the valuation argument in CVS' favor, although Walgreen shoppers could be more loyal than CVS expects.
Eric Novinson owns shares of CVS. The Motley Fool owns shares of Express Scripts. Motley Fool newsletter services recommend Express Scripts. 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. If you have questions about this post or the Fool’s blog network, click here for information.