This Leading Pharmaceutical Business Is a Buy

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

In the third quarter, Walgreen (NYSE: WAG) has been a target of several famous investors including George Soros, Tom Gayner, and Leon Cooperman. For George Soros and Leon Cooperman, Walgreen is a new buy for them, with 3.6 million shares and 1.88 million shares respectively. Tom Gayner increased his holdings of Walgreen by nearly 150%, to 2.15 million shares. It seems that all three investment gurus have seen the value of this pharmaceutical retailer going forward. What do they see in Walgreen? Should investors buy Walgreen for themselves?

Business snapshot

Walgreen is the biggest pharmaceutical store chain in the US, providing shoppers with prescription and non-prescription drugs, household foods, convenience, personal care, beauty care, and fresh foods. In fiscal 2012, Walgreen owned total 8,385 stores including 7,930 Drugstores, 11 Specialty Pharmacies, 366 Worksite Health and Wellness Centers, 76 Infusion and Respiratory Services Facilities, and 2 Mail Service Facilities. The majority of its revenue derived from the sale of prescription drugs, accounting for around 63% of total sales. The second and third biggest revenue sources were general merchandise, of 25%, and non-prescription drugs, of 12%, respectively.

An Acquisition to Create the Global Pharmaceutical Retailing Empire

Walgreen has expanded its business in Europe and several emerging markets through an acquisition of Alliance Boots GmbH to own a piece of the retailer operating in 11 countries, with more than 3,330 health and beauty retail stores, including pharmacies in more than 3,200 stores. In August, 45% of Alliance Boots belonged to Walgreen with the price of $6.7 billion; in addition, Walgreen had a call option to purchase the rest of 55% in 6-month period from February 2015. 

Interestingly, Mr. Stefano Pessina mentioned that he would not take any money out of the deal, but instead would own 8% of Walgreen. That signals his belief in the future of Walgreen after the deal. Indeed, the deal would give Walgreen the strong foundation of Alliance Boots’ experience in emerging markets such as Latin America and China. The purchase of Alliance Boots has created the largest global pharmacy business ever with 11,000 stores in 12 countries, nearly 50% higher than the store count of its rival CVS Caremark (NYSE: CVS), with around 7,400 retail stores, and more than two times higher than the store count of Rite Aid NYSE: RAD), with around 4,600 stores.

Because the stake in Alliance Boots was booked into Walgreen’s financial statement in the form of equity method (one-line reporting), thus, only the net income and the total equity would reflected the 45% of Alliance Boots’ net income and total equity. Because of the equity method accounting, we would expect in the near future, Walgreen’s net margin will improve because of higher net income on the same level of sales. 

Cheap Valuation and Highest Yield

Among the three peers including Walgreen, CVS and Rite Aid, CVS seems to have the strongest performance in the stock performance year-to-date, with 18.5% gain, whereas Walgreen ranks the second, with 12.6% gain. Rite Aid experienced a loss of nearly 20% in the market value. Rite Aid is the smallest company in terms of market capitalization, of nearly $940 million. It hasn’t paid any dividends in the last 10 years, whereas the dividend yield of Walgreen is 2.7%. Even after the dividend increase to 90 cents per share, CVS yield would only be around 1.83%, lower than that of Walgreen. At the current price, Walgreen is valued at 8.3x EV/EBITDA, CVS is valued at a comparable valuation, of 8.21x EV multiples, Rite Aid is the most expensive, with 10.72x EV/EBITDA.

My Foolish Take

With a decent valuation, highest dividend yield among its peers, and the global market leading position in the pharmaceutical retailing business, Walgreen is the stock of choice for long-term value and income investors. Investors might feel more confident when those investment gurus showed their bullish attitude towards the stock recently.

hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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!

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