With over 8,000 drugstores, 240,000 employees and 784 million prescriptions filled each year, Walgreen Company (NYSE: WAG) leads the chain drugstore industry in sales and profits. The company has paid continuous dividends at least since 1972. Next in market cap only to CVS Caremark Corporation (NYSE: CVS), Walgreen's completed its acquisition of Duane Reade, the New York drugstore chain in 2010. Since then the company has aimed to provide better service to customers, this includes moving pharmacists away from phone calls with insurance companies and toward contact with customers in the store. Walgreen drugstores are engaged in the retail sale of prescription and non-prescription drugs and general merchandise, including household products, convenience and fresh foods, personal care, beauty care, photofinishing and candy.
Bonus: Want to know Walgreen's dividend quality trend and it's dividend coverage? Get a free dividend quality analysis now!
Walgreen Company reported its preliminary financial results for the year ended 2013-08-31 this week (WAG earnings call transcript). Based on these results we provide a peer-based analysis of the company; see the end of this post for the peer list we used. Our analysis is based on the company's performance over the last twelve months (unless stated otherwise). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.
| Annual (USD million) | 2013-08-31 | 2012-08-31 | 2011-08-31 | 2010-08-31 | 2009-08-31 |
|---|---|---|---|---|---|
| Revenues | 72,217.0 | 71,633.0 | 72,184.0 | 67,420.0 | 63,335.0 |
| Revenue Growth % | 0.8 | (0.8) | 7.1 | 6.4 | 7.3 |
| Net Income | 2,450.0 | 2,127.0 | 2,714.0 | 2,091.0 | 2,006.0 |
| Net Income Growth % | 15.2 | (21.6) | 29.8 | 4.2 | (7.0) |
| Net Margin % | 3.4 | 3.0 | 3.8 | 3.1 | 3.2 |
| ROE % | 13.0 | 12.8 | 18.5 | 14.4 | 14.6 |
| ROA % | 7.1 | 7.0 | 10.1 | 8.1 | 8.4 |
Valuation Drivers
Walgreen Co.'s current Price/Book of 2.7 is about median in its peer group. The market expects WAG to grow at about the same rate as its chosen peers (PE of 21.9 compared to peer median of 20.9) and to maintain the peer median return (ROE of 13.0%) it currently generates.
The company's asset efficiency (asset turns of 2.1x) and net profit margins of 3.4% are both median for its peer group. Its net margin is similar to last year's low of 3.0%, which compares to the 2011 high of 3.8%.
High Capital Investment
Walgreen Co.'s revenues have grown at about the same rate as its peers (2.3% vs. 2.5% respectively for the past three years). Similarly, the stock price implies median long-term growth as its PE ratio is around the peer median of 21.9. The historical performance and long-term growth expectations for the company are largely in sync.
WAG's annualized rate of change in capital of 12.7% over the past three years is higher than its peer median of 1.0%. This investment has generated an above peer median return on capital of 12.0% averaged over the same three years. Evidently, the relatively high capital investment was successful given the relatively strong growth in its returns.
Earnings Quality
Walgreen Co.'s net income margin for the last twelve months is around the peer median (3.4% vs. peer median of 3.4%). This average margin combined with a level of accruals that is around peer median (2.6% vs. peer median of 2.1%) suggests there possibly isn't too much accrual movement flowing into the company's reported earnings.
WAG's accruals over the last twelve months are positive suggesting a buildup of reserves. However, this level of accruals is also around the peer median and suggests the company is recording a proper level of reserves compared to its peers.
Trend Charts
Peers used for analysis of Walgreen Co.
Walgreen Co.'s analysis today uses the following peer-set: CVS Caremark Corporation (NYSE: CVS), Express Scripts Holding Company (NASDAQ: ESRX), Shoppers Drug Mart Corporation (TSE:SC), Omnicare, Inc. (NYSE: OCR) and Rite Aid Corporation (NYSE: RAD).
Bonus: Want to know Walgreen's dividend quality trend and it's dividend coverage? Get a free dividend quality analysis now!
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