Is Walgreen Company (WAG) a Good Stock to Buy?

In the last year, the stock price of Walgreen Company (NYSE:WAG) has risen 48% following the settlement of its dispute with Express Scripts Holding Company (NASDAQ:ESRX). The second quarter of the $46 billion market cap retail pharmacy’s fiscal year ended in February, with Walgreen reporting flat revenue compared to the same period in the previous fiscal year. With lower cost of goods sold offsetting increases in SGA expenses, however, the company was able to grow its net income; however, due to a higher share count earnings per share grew by only a penny. This followed a first fiscal quarter in which results had not been as strong.

The stock trades at 22 times trailing earnings, but if we annualize the $1.23 per share that Walgreen Company (NYSE:WAG) earned in the first half of the current fiscal year we get a slightly lower P/E multiple- and that is with the second quarter of the year significantly outperforming the first (the q/q improvement had been only slight in the last fiscal year, so we don’t think that this was entirely due to seasonal factors). Wall Street analysts expect better numbers in the two remaining quarters, and then still stronger performance in the fiscal year ending in August 2014. Consensus estimates imply a forward P/E of 13. We’d certainly prefer Walgreen to be doing better as things stand rather than being so dependent on future improvements, and perhaps it would be better to watch for another quarter or two of results to see if the company is in fact on track.

Walgreen Company (NYSE:WAG) was one of the most popular healthcare stocks among hedge funds during the fourth quarter of 2012, according to our database of 13F filings (find more healthcare stocks hedge funds loved). Billionaire Steve Cohen’s SAC Capital Advisors reported a position of 1.2 million shares (see Cohen’s stock picks). The largest position in the stock out of the filers we track belonged to Orbis Investment Management; that fund, which is managed by William Gray, disclosed ownership of over 7 million shares (check out more stocks Orbis owns).

Walgreen’s two closest peers are CVS Caremark Corporation (NYSE:CVS) and Rite Aid Corporation (NYSE:RAD). These companies’ stocks have also been up nicely in the last year, though Rite Aid’s financials seem to show some struggling. Revenue was actually down slightly in its most recent quarterly report versus a year earlier, and while earnings did far outperform expectations the stock is still valued very expensively against both its trailing results and forward earnings estimates (the P/E there is 21). CVS carries trailing and forward P/E multiples of 19 and 13, respectively, so it too is getting a good deal of its valuation from expected earnings growth. It’s probably smart to treat that company similarly to Walgreen, waiting to see how results unfold.