Don’t Be Fooled: Walgreen Still Not a Buy
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The article on Walgreen Company (NYSE: WAG) toward the end of last year was a less than ringing endorsement for what appeared to be an undervalued option in the pharmacy/retail sector. At the time the alternatives – including industry leader CVS Caremark (NYSE: CVS) and Medco Health Solutions (UNKNOWN: MHS.DL) – appeared to be expensive in comparison.
And now with CVS’ recent earnings announcement the disparity is likely to get even wider. So, does that finally make Walgreen an opportunity worth investigating? Not in the slightest. Unfortunately too many of the problems that were holding Walgreen stock back at the end of 2011 are still present – and in fact, in the case of the Express Scripts (NASDAQ: ESRX) fiasco, have gotten even worse.
Before we re-visit Walgreen, a quick run through of the results of CVS’ last quarter are warranted. At $58.4 billion and the leading dispenser of pharmaceuticals in the country, CVS already had a firm hold on the market. As it turns out – and not surprisingly given Walgreen's little run-in with Express Scripts last year – CVS was happy to oblige the many customers that have since left Walgreen to look for greener prescription pastures.
Analysts had already expected CVS to outperform the year-ago period, and they did – handily. What was slightly surprising was beating the analyst guesstimates, and according to CEO Larry Merlo the primary reason for the outstanding performance was – you guessed it – customers fleeing Walgreen. Even factoring in one-time expense items CVS trumped last year’s numbers handily – earning $0.59 a share vs. $0.52 in 2011, a solid 13%+ gain in earnings on top of a whopping 20% jump in revenues. When you remove the one-time expense items profit increases to $0.65 a share. Thanks Walgreen.
It must be said that Mr. Merlo should receive some of the credit too. He didn’t sit back and wait for ex-Walgreen’s customers to stroll over to CVS – he cranked up the marketing to help spur them along, and it obviously worked to perfection.
As for Walgreen the same concerns from four months ago still resound – the reimbursement problems with Express Scripts and the subsequent end of that relationship, along with CEO Greg Wasson’s overly optimistic minimization of the impact. Not to mention trying to manage continually rising expenses that continue to put pressure on earnings even after three straight quarters of revenue gains. For all these reasons it shouldn't be surprising Walgreen recently lowered same store sales expectations for April.
The relationship with Express Scripts ended too abruptly – abrupt in the sense that it appears Mr. Wasson didn’t take the time to really analyze the potential impact, and just as importantly look for alternatives before saying “That’s it, I don't want to play. I’m taking my ball and going home.”
The result? Potential investors and Walgreen shareholders are in the same spot they were in months ago – lamenting the minimal rise in share price YTD and looking up at competitors that don’t offer, at least at first glance, nearly the value opportunity.
The investment opinions included are just that, opinions. Investing involves risk, as you well know, so consider your decisions wisely. Tim holds no position in the securities mentioned in this article.