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Why Walgreen Is a Buy


Baby boomers going on Medicare bodes well for the pharmacy.

MINYANVILLE ORIGINAL Despite Walgreen's (WAG) difficulties with Express Scripts (ESRX), the stock still seems like a buy to us.walgreens-logo

Granted, Walgreen pharmacies will not be filling any Express Scripts prescriptions until September, which means that they will forgo the "back to school" business. However, when looking at demographics, this little hiccup will, in time, seem insignificant.

In 2011, the first of the baby boomers started pulling government sponsored benefits, including Medicare. According to the Social Security Administration (Fiscal Year 2012 report), roughly 10,000 people per day are signing up. Granted, many of those consumers already have a routine and are comfortable with their current prescription provider. However, for some, once they are eligible for cheap government-sponsored benefits, they will be on the hunt for the prescription vendor that meets their needs.

That bodes well for Walgreen.

Seemingly not in its favor is that recently, Walgreen's debt was downgraded. The downgrade is mainly due to Walgreen's recent acquisition of 45% of the largest drug store chain in Europe (Alliance Boots). Creditors are not excited about Walgreen shelling out $4 billion in cash to expand globally.

From a fundamental analysis standpoint, Walgreen seems to be attractively priced, especially vis-à-vis competitor CVS (CVS).

Hard Numbers

Even after the Express Scripts announcement, Walgreen still shows very bullish short- and medium-term technical trends and is not currently overbought.

Click to enlarge

Walgreen bests CVS in many of the valuation ratios seen in the chart below. Of note, Walgreen is supporting a dividend more than two times CVS's dividend, and has multiple valuation ratios that highlight Walgreen's case. As an example, assuming that Walgreen had a similar EV/EBITDA and P/E ratios to CVS, Walgreen's stock price would be approximately $45.50 and $49.50, respectively.

We're not alone in calling Walgreen undervalued. Other analysts have put a median target of $37 on the company. The analysts at Trefis put Walgreen's value at $39.73.


We have targeted Walgreen as a strong buy. The upcoming reinstatement of Express Scripts plus the positive demographic and economic outlook for Walgreen warrant a higher stock price. In our opinion, a fair median price would be approximately $43, which equates to a 19% increase over its current value.

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