Walgreen (WAG) Analysis

From Walgreen 10-Q, Walgreens is a retail drugstore chain that sells prescription and non-prescription drugs and general merchandise. General merchandise includes, among other things, cosmetics, toiletries, food, beverages, household items and photofinishing. Customers can have prescriptions filled at the drugstore counter, as well as through the mail, by telephone and on the Internet. As of November 30, 2005, we operated 5,068 locations (including seven mail service facilities) located in 45 states and Puerto Rico. The store total now includes 33 home care locations but excludes 22 stores closed due to Hurricane Katrina.
The drugstore industry is highly competitive. In addition to other drugstore chains, independent drugstores and mail order prescription providers, we also compete with various other retailers including grocery stores, mass merchants and dollar stores.
The long-term outlook for prescription sales is strong due in part to the aging population, as well as the continued development of innovative drugs that improve quality of life and control healthcare costs. As of January 1, 2006, the new Medicare Part D prescription drug program will be in effect. While it is difficult to fully predict the business impact, we believe we are well positioned to capture additional Medicare prescription sales. During fiscal year 2005, the precursor to this program, Medicare senior discount cards, gave us additional prescription sales, although the gross margin rates on these sales were lower.

The number of stores operated by Walgreens increased by 7.5% year over year. The revenues increased by 10% year over year. Approximately 65% of Walgreen earnings are through prescription drugs. The risk to Walgreen is that many drugs are going off the patent list with equivalent generics available. In the latest quarter, the impact of the generics was as follows. From Walgreen 10-Q, "The effect of generic drugs, which have a lower retail price, replacing brand name drugs reduced prescription sales by 2.0% in the first quarter versus 2.3% for the same period a year ago. Third party sales, where reimbursement is received from managed care organizations as well as government and private insurance, were 92.5% of prescription sales compared to 92.6% a year ago." Even then, prescription based generics didnt seem to have negative impact on sales. Again from 10-Q "Gross margins as a percent of total sales were 27.5% in the quarter compared to 27.4% last year. Prescription margins increased primarily because of higher generic drug utilization. The higher generic drug utilization was principally due to a steady stream of new generics over the past year. Non-prescription margins decreased due to our sales mix moving to lower margin categories."

The morning star article rates Walgreens a buy. (http://news.morningstar.com/article/article.asp?id=155248&pgid=wwhome1a) The analyst estimates are for 15% growth in 2007 compared to 2006. The ageing population + increase in stores should bode well for Walgreens. The sales growth is expected to be about 12%. The current market cap for Walgreens is 43billion with a P/E of 28. The stock is not cheap given its growth rate and P/E. If the price of the stock dropped by five-ten dollars, it would be a much stronger buy.