During the third quarter, Alliance Boots contributed $0.10 to Walgreen’s adjusted earnings per share. Walgreen now expects cost-saving synergies from this partnership to come in at $125 million to $150 million for the first year, up from a prior forecast of $100 million to $150 million.
Versus competitors
A weak spot for Walgreen was its front-end (non-pharmacy) same-store sales, which grew by an anemic 0.4%. However, this was a considerable improvement from the 2.6% decline it reported a year earlier. It was in line with Rite Aid, which reported 0.3% growth, but far behind CVS Caremark’s 1.4% gain. From the following chart, we can see that CVS continues to outperform Walgreen in terms of top and bottom line growth as well.
Although Rite Aid is smaller than Walgreen and CVS, investors should also note that the company recently reported its third consecutive quarter of profitability, after spending several years deep in the red. A fundamental comparison of these three companies also shows that each one has its own merits.
Forward P/E | Price to Sales (ttm) | Return on Equity (ttm) | Debt to Equity | Operating Margin | Profit Margin | |
Walgreen | 12.25 | 0.64 | 12.19% | 33.51 | 4.86% | 2.91% |
CVS Caremark | 12.75 | 0.57 | 10.65% | 25.29 | 6.11% | 3.30% |
Rite Aid | 11.24 | 0.10 | N/A | N/A ( 5.91B Debt) | 3.44% | 0.94% |
Advantage | Rite Aid | Rite Aid | Walgreen | CVS | CVS | CVS |
Source: Yahoo! Finance, 6/26/2013
The Foolish Bottom Line
Looking forward, investors should keep an eye on the balance between top and bottom line growth in these three companies. While rising generic drug sales are a boon to margins and profits, they are heavily dependent on higher sales volume. Otherwise, sales growth will wane, as seen with Walgreen’s third quarter earnings. Some analysts are concerned about the sustainability of this business model, and others worry that the prices of generics will fall, crimping margins as well as revenue growth.
However, the federal government is planning to expand healthcare coverage to nearly 30 million Americans next year, which will boost demand for generics and drive up sales volumes at Walgreen, CVS and Rite Aid. In addition, when the turmoil in Europe subsides, Walgreen’s investment in Alliance Boots could yield substantial profits in the long run. If that’s the case, then Walgreen could be a great long-term buy on post-earnings dips like these.
In 2011, a massive shift began. With the first of the baby-boomer generation reaching Medicare age, America’s health care landscape was forever changed. Combine the aging population with the impact of Obamacare, and the need for innovative solutions for skyrocketing health care costs is as clear as ever.
The article Is It Time To Invest in This Drugstore? originally appeared on Fool.com and is written by Leo Sun.
Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Express Scripts. The Motley Fool owns shares of Express Scripts. Leo is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
