Walgreen (WAG) Making the Right Moves for Long-Term Growth -Barron's
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Walgreen (NYSE: WAG) announced last week that they have purchased NY-based Duane Reade for approximately $1.075 billion, and Barron's believes that this move is yet another in a series of impressive choices made by the drugstore giant.
Duane Reade will offer Walgreen access to New York with 257 stores around the city. The company CFO commented that it would've "taken 20 years to get this kind of footprint in NY, with lower margins."
The purchase comes as Walgreen's is giving itself a bit of a face-lift. Some items that they're working on include store redesigns, improved displays, and a more diverse product assortment. 40% of their stores are expected to be redesigned by year-end.
For Q110, Walgreen reported an EPS of $0.49, which is a 20% increase Y/Y, with only a 10% increase in revenues. The Duane Reade deal is expected to reduce FY11 EPS by $0.10, with a current consensus of $2.70. FY10 EPS is expected to be $2.30 on revs of $67.81 billion.
An analyst from BB&T Capital Markets believes that Walgreen may be underestimating the savings that it could potentially see for FY11, and could see an EPS of $2.95. Based on this, the analyst believes that WAG could hit a P/E multiple of 16.3X FY11 EPS estimates, below the historical 25x, but above today's current rate of 11x.
Walgreen currently has a $2 billion stock buyback program in place, which could add to the company's EPS. The program has a four-year time line on it. The company also pays a $0.55 dividend, yielding 1.6%.
Walgreen also expects to ebb organic store growth to 2.5% - 3% per year, from 9% in 2008, and cut costs by an estimated $1 billion by FY11, mostly through labor reductions.
Walgreen also controls about 19% of the U.S. prescription-drug market, and could get a boost from a flood of high-margin generic drugs that are expected to hit the market in 2011.
With improving margins from aging stores, 257 new locations in the Big Apple, a juicy dividend, and generic drugs increasing in 2011, Walgreen's may be just the prescription an ailing portfolio needs.
Duane Reade will offer Walgreen access to New York with 257 stores around the city. The company CFO commented that it would've "taken 20 years to get this kind of footprint in NY, with lower margins."
The purchase comes as Walgreen's is giving itself a bit of a face-lift. Some items that they're working on include store redesigns, improved displays, and a more diverse product assortment. 40% of their stores are expected to be redesigned by year-end.
For Q110, Walgreen reported an EPS of $0.49, which is a 20% increase Y/Y, with only a 10% increase in revenues. The Duane Reade deal is expected to reduce FY11 EPS by $0.10, with a current consensus of $2.70. FY10 EPS is expected to be $2.30 on revs of $67.81 billion.
An analyst from BB&T Capital Markets believes that Walgreen may be underestimating the savings that it could potentially see for FY11, and could see an EPS of $2.95. Based on this, the analyst believes that WAG could hit a P/E multiple of 16.3X FY11 EPS estimates, below the historical 25x, but above today's current rate of 11x.
Walgreen currently has a $2 billion stock buyback program in place, which could add to the company's EPS. The program has a four-year time line on it. The company also pays a $0.55 dividend, yielding 1.6%.
Walgreen also expects to ebb organic store growth to 2.5% - 3% per year, from 9% in 2008, and cut costs by an estimated $1 billion by FY11, mostly through labor reductions.
Walgreen also controls about 19% of the U.S. prescription-drug market, and could get a boost from a flood of high-margin generic drugs that are expected to hit the market in 2011.
With improving margins from aging stores, 257 new locations in the Big Apple, a juicy dividend, and generic drugs increasing in 2011, Walgreen's may be just the prescription an ailing portfolio needs.
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