March 28, 2012
Welcome to the Stock of the Day for March, 28, 2012. As American consumers have demanded more from their shopping experience, pharmacies have evolved from mom-and-pop shops to full-fledged retail chains that rival the selection of many grocery stores. Today, we're going to review Walgreen Co. (WAG) and see whether this American institution belongs in your investing plan.
Company Overview: Walgreen, commonly known as "Your Home for Prescriptions, Photos and Health Information", is the largest drug retailing chain in the U.S. Currently headquartered near Chicago, the company operates over 8.200 stores across the country. The company's roots stretch back to 1901, when Charles R. Walgreen opened a drug store in Chicago and quickly expanded his empire to five stores within twelve years. Over the years, the Walgreen chain has grown to include everything from household products to fresh foods to beauty care and photofinishing services. The company brings in about $73 billion in sales per year and rewards it shareholders with a 2.6% dividend yield.
Industry Breakdown: There are only 11 companies in the Drug Stores industry. Of those, Walgreens ranks towards the middle in terms of fundamentals. Walgreens is second only to CVS in terms of market cap, and its dividend yield is highest in the industry. In addition, its 19% return on equity is second best in the industry. However, the company's earnings growth is ranked fourth while its sales growth is seventh. Also, its Price/Earnings to Growth ratio is fifth in the industry and its lackluster long-term growth rate is ranked at number seven. Walgreen's main competitors are CVS Caremark Corp. (CVS), Rite Aid Corp. (RAD) and Wal-Mart Stores Inc. (WMT). Of these, Walgreen has the highest gross margin but the second-lowest sales growth and operating margin.
Earnings Buzz: Walgreen Co. reported second-quarter earnings before the opening bell on Tuesday, and the results were mixed. Compared with the same quarter last year, net earnings declined 8% to $639 million, or $0.78 per share. Nonetheless, analysts were expecting earnings of $0.77 per share, so the company posted a modest earnings surprise. Over the same period, sales climbed just 0.8% to $18.65 billion. Analysts forecast sales of $18.52 billion, so the company also posted a modest sales surprise.
Current Ratings: Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. Over the past nine months, this stock has suffered a significant decline, going from an A-rating in July to a D-rating in March. To start, the company's fundamentals are lackluster at best. To be fair, the company earns a B-rating in operating margin growth, cash flow and return on equity. However, it scrapes by with just a C for sales and earnings growth as well as earnings momentum and revisions. Finally, earnings surprises have been so poor lately that the company receives an F-rating on that front. Overall, this company earns a C in fundamentals. Now, what keeps it in sell territory is its rock-bottom level of buying pressure.
Bottom Line: At this moment I recommend that you keep away from this stock. Perhaps the company's latest earnings report will improve its Portfolio Grader score, but I'm not counting on it.
Sound Off: What do you think about WAG? Are you a buyer at current prices? Let me know what you think by posting on our wall on Facebook.
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