Sure Walgreen’s is Cheap, and for Good Reason
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As a proponent of value investing, I’m always on the lookout for inexpensive stocks relative to others in their industry. So you’d think a well-known company like Walgreen Co. (NYSE: WAG) would fit the bill. Alas, it is not to be.
Too Many Problems
Though Walgreen is first and foremost a chain of pharmacy stores, they also offer customers a diversified line of consumer products. At first glance, that’s a good thing. The more diversity in retail lines the less reliance on the whims of one or two products. Unfortunately, the problems with WAG go well beyond the products offered.
Though sales were up in the recent quarter year-over-year, profits were down; and you know what that means. Controlling expenses -- or not controlling them in Walgreen’s case -- had a much bigger impact than either the company or analysts expected. And investors have had to bite the bullet, with the stock dropping about 9% already this past week, bringing the total (lack of) return for the year to nearly 20% in the red.
And if today’s open is any indication, and it is, about the only way investors will see a return in the immediate future from Walgreen’s is to short the stock. With operating expenses rising and what appear to be irreconcilable differences with pharmacy benefits provider Express Scripts (NASDAQ: ESRX), 2012 doesn’t look any better. Of course, fewer prescriptions will also impact ancillary sales from those customers who come into the stores to get their orders filled.
According to President and CEO Greg Wasson, even without ESRX on the books in 2012 he expects the company to achieve 97% to 99% of this year’s prescription sales volume. First, that’s mighty optimistic and second any drop in revenue at a time when margins are squeezed by increasing expenses is nothing to write home to Mom about. Though, by the sound of things that’s what Mr. Wasson is attempting to do.
Here’s where things get frustrating. In an industry with leaders like CVS Caremark (NYSE: CVS), Medco Health Solutions (UNKNOWN: MHS.DL) and Omnicare (NYSE: OCR) toting P/E ratios ranging from 16 all the way up to OCR’s staggering 62, even the most modest results from Walgreen would be a godsend. Even with WAG’s 2.9% yield and an inexpensive 10.56 P/E, pulling the trigger would be unwise right now.
Until expenses come in line with revenues and investors can see what a quarter without Express Scripts really looks like, Walgreen is a risk right now that’s probably not worth taking.
The investment opinions included are just that, opinions. Tim is not a licensed investment professional, nor has he been for several years. Investing involves risk, as you well know, so consider your decisions wisely.