Does Walgreen have the cure for what ails investors?

CEO Gregory Wasson's turnaround has been successful.

By Jonathan Berr Oct 2, 2013 12:06PM

Investors in Walgreen Co. (WAG)  don't need a spoonful of sugar to help the medicine go down because returns from the largest drugstore operator have been plenty sweet.

Shares of the largest drugstore chain have surged more than 50 percent this year as Chief Executive Gregory Wasson's turnaround has taken hold. Along with improving the company’s fresh food and beauty offerings, Wasson has implemented a successful loyalty card program and pushed the company further into the wellness business.


During the most recent quarter, Walgreen posted solid results. Net income surged 86 percent to $657 million, or 69 cents per share, from $353 million, or 39 cents, a year earlier. Excluding one-time items, profit was 73 cents, a penny better than analysts’ expectations. Revenue rose 5.1% to $17.94 billion, slightly under the $17.95 billion analysts had forecast. Shares closed Tuesday at $56.24.

People walk by a Walgreens in Boston, Mass., on April 30, 2013 (Photo by Wendy Maeda/The Boston Globe via Getty Images)Sales at stores opened at least a year, a key retail metric, rose an impressive 4.6% even as customer traffic fell 1.9 percent. Comparable sales improved even more in September. The company benefited from increased sales of generic drugs, which carry higher margins and lower prices than their brand name counterparts. Revenue  in the front of the store, which had been a weak spot, gained 1.6 percent in the quarter and jumped 6.4 percent in pharmacy department.  Walgreeen's 45 percent stake in U.K.-based Alliance Boots also is paying off.

Walgreen is also well positioned for Obamacare, which opened its online exchanges yesterday. The company has also been adding primary health care services such as immunizations, which will attract some of the millions of uninsured people who will soon get coverage under the law.  Customers at 350 stores can get treated for minor aches and pains by the chain’s nurse practioners.

Though shares of Walgreen have a spring in their step, they are kind of pricy, so there is no sense of urgency to buy them. They trade at a price-to-earnings ratio of 23.68, a five-year high, according to Reuters. They are trading above their average 52-week price target of  $54.31. Some analysts think Walgreen will climb higher. Analysts at Morgan Stanley (MS) have raised their price target on the stock to $70.

Given the uncertainties around the stock,  investors should take a pass on the shares until there is a pull back in the price.

Follow Jonathan Berr on Twitter @jdberr or on Berr's World.

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