Does This Corner Drug Store Have Its Investor’s Prescription?

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

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As the new year begins, I would like to pinpoint a leading operator of a drugstore chain in the United States, Walgreen (NYSE: WAG).

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Strengths:

  • Solid Revenue Growth: In 2007, Walgreen reported revenue of $53.76 billion; in 2012, the company announced revenue of $71.63 billion, representing year over year annual growth of 5.91%, and this trend of solid growth is highly anticipated to sustain, with projections placing 2016 revenue at $97.81 billion; Walgreens growth has been fueled by a combination of strong demand for their products and expansion in the number of Walgreen stores
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  • Dividend: Currently, Walgreen pays out quarterly dividends of $0.28, which annualized puts the dividend as yielding 2.98%
  • Institutional Vote of Confidence: 62% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future
  • Basement Valuation: At the moment, Walgreen carries a price to earnings ratio of 16.55, a price to book ratio of 1.89, and a price to sales ratio of 0.48, all of which indicate a company trading with a basement valuation
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  • Cash & Equivalents: Walgreen currently possesses $1.83 billion of cash and cash equivalents on their balance sheets, a major upside to the business
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  • Strong Translation of Revenue into Profit: Over the past years, revenue growth has been outmatched by the growth in gross profit, representing margin expansion, a sign of a strong company primed for growth into the future; this margin expansion has been the result of a gain in market share by Walgreen in the prescription industry
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  • Strong Position in Industry: Walgreen presently holds a 18.5% market share of the retail prescriptions industry, a strong position which is only set to grow into the future due to innovative offerings by Walgreen
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Weaknesses:

  • Single Digit Margins: Walgreen currently carries a net profit margin of 2.97%, which is below the ideal double digit range and leaves little room for unexpected expenditures
  • Debt: Walgreen currently holds $5.07 billion of debt on their balance sheets, a major downside to the business
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  • Falling Revenue per Retail Prescription: In 2011, the average revenue per retail prescription filled came in at $65.90; currently, the average revenue per retail prescription filled is only $64.90, and this falling revenue per retail prescription leads to less revenue for Walgreens; this decline in revenue per prescription has been caused by an increase in generic offerings, a trend which is only expected to sustain into the future
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Opportunities:

  • Gaining Market Share: Walgreen has plenty of room to expand in the United States retail prescriptions industry, and gaining market share could prove to be a major opportunity for the company that could fuel growth into the future
  • Increasing Number of Walgreen Retail Drugstores: Since 2009, Walgreen has increased the number of retail drugstores in the United States by 870, and further increases in the number of stores is widely anticipated to occur as Walgreen attempts to expand
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  • Dividend Growth: Since implementing their dividend program in 1933, Walgreen has consistently raised their dividend payouts, and this trend is widely anticipated to continue into the future
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  • Growth in Prescription Market: 59.95% of Walgreen’s total business is concentrated in its prescription drugs sales segment, which is located in an industry growing at a relatively fast pace, and further growth in this industry could lead to overall company growth for Walgreen
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Threats:

  • Competition: The prescription drug industry is highly competitive, with several other major corporations battling with Walgreen, and this competition to offer the best product for the least amount of money can over time lead to margin compression
  • Fiscal Cliff: if the United States was to fall off of the fiscal cliff, tax rates would be raised on nearly all Americans, leaving them with less money to spend at possibly a Walgreen store
  • Rising Input Prices: If any of Walgreen’s input prices were to rise, the company would be faced with the difficult decision of passing the extra costs onto their customers or swallowing the pain in their already strained margins

Competitors:

Major publicly traded competitors of Walgreen include CVS Caremark (NYSE: CVS), Rite Aid (NYSE: RAD), Express Scripts (NASDAQ: ESRX), and Catamaran (NASDAQ: CTRX). All of these companies compete with Walgreens in either their prescription drug business segment or their drugstore operations. CVS is valued at $60.04 billion, pays out a dividend yielding 1.87%, and carries a price to earnings ratio of 16.17. Rite Aid is valued at $1.22 billion, does not pay out a dividend, and carries a negative price to earnings ratio. Express Scripts is valued at $43.21 billion, does not pay out a dividend, and carries a price to earnings ratio of 31.10. Finally, Catamaran is valued at $9.63 billion, does not pay out a dividend, and carries a price to earnings ratio of 57.23.

The Foolish Bottom Line:

On a financial note, Walgreen is relatively strong, with a few major weaknesses. The company possesses solid revenue growth, a growing dividend, and a basement valuation. On the other hand, the company carries a massive debt load as well as a business model strained with meager margins. The company’s future is filled with opportunities that could lead to potential growth; however the company faces stiff competition in its main prescription drugs segment. All in all, Walgreen is a solid investment with solid revenue growth and a growing dividend, one which should perform slightly above the market average in the coming years.


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool owns shares of Catamaran and Express Scripts. Motley Fool newsletter services recommend Catamaran and 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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