Walgreen (WAG) at $34 is a Buy -Cramer
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On last night's episode of Mad Money, Jim Cramer pitted two top drug retailers against each other during his "In The Ring" segment: Walgreen (NYSE: WAG) and CVS Caremark (NYSE: CVS). Notably, Cramer currently owns Walgreen for his charitable trust, Action Alerts PLUS.
In order to evaluate each pharmacy's growth, Cramer looks at same store sales as a great metric: CVS reported comps up 3.1% most recently, while Walgreen reported same store sales up 4.1% over the same period. Cramer says Walgreen's growth looks more promising, especially when considering that its sales were more balanced, compared to CVS, between the front-of-the-store products and its pharmacy.
Also important, according to Cramer: growth strategy. Cramer mentioned that he initially viewed CVS's acquisition of Caremark last year as bullish, but now sees that the purchase didn't work out as well as planned. With the recent announcement that CVS will buy Longs Drug Stores (NYSE: LDG), Cramer is worried that another buyout will drag down CVS's earnings for too long. Meanwhile, Walgreen has chosen to take a completely different path - it will focus on quality of existing stores rather than expansion. Recently, Walgreen lowered its long-term store growth estimate from 8% by 2009 to 5% by 2011, strengthening Cramer's point on making stores better.
Cramer believes that Walgreen's premium multiple compared to CVS (14.5x and 12.7x, respectively) is justified given the above comparisons. He believes Walgreen's is a buy, but said he would wait for a pullback to the $34 level before pulling the trigger.
Walgreen Co. operates a chain of drugstores in the United States.
CVS Caremark Corporation operates retail pharmacy and pharmacy benefit management businesses in the United States.
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