Home > Stock Analysis

Takeover The Right Prescription For Longs Drugs?

Posted: Oct 22, 2007 09:35 AM by Glenn Curtis

Tickers in this Article: LEH, WMT, RAD, WAG, LDG

The heyday of the local mom-and-pop drugstore has long since passed. The few that still exist are being swallowed up or forced out of business by the large drug chains such as Walgreen (NYSE:WAG) and Rite Aid (NYSE:RAD) and discounters such as Wal-Mart (NYSE:WMT).

Get Free Stock Analysis By Email

Consolidation has become the norm, as these big-name, deep-pocketed chains look to propel their earnings and their stock prices higher. Over the last several months the need to consolidate and save on operational costs has become even greater, as some of the industry's leaders, such as Walgreen, have stumbled as the economy has slackened. I think the chain with the biggest target on its back right now is Longs Drugs (NYSE:LDG).

Hawaiian Push
In the past, I pointed out that its heavy presence in lucrative areas such as Northern California might make it attractive to potential suitors. And in my opinion, that feature remains just as alluring as ever. What's really interesting, however, is that over the last month or so Walgreen has made a push to expand its presence in Hawaii, where Longs has a strong foothold. This has led to some speculation that it might be cheaper for the company to acquire locations there rather than build from scratch.

Another thing that makes it attractive to me is that, despite the intense competition in other markets and the spread of low margin generic drugs, the company has continued to hold its own. During the month of September, Longs showed same store sales growth of 1.8%. In this market, and given the company's relative size, that's not too shabby.

Going Long
Furthermore, the company is starting to get a fair amount of attention because of its future growth prospects. On October 15, the Associated Press reported that Meredith Adler at Lehman Brothers (NYSE:LEH) upped her fiscal 2009 earnings estimates for the company to $3.17 per share from $3.02 and raised her rating on the stock to 'Overweight' from 'Equal Weight'. In short, I sense that Adler might not be alone in her admiration for the company and that other analysts may soon follow a similar course. This could drive up the price of the shares. If there is a suitor out there, it might make sense to step in and make a bid before the stock bumps higher.

Finally, the company has several strong assets. Taking a glance at its most recently filed 10-Q, and more specifically its balance sheet, the company had about $24.4 million in cash and equivalents at quarter end, $301.1 million in accounts receivable, $494.4 million in inventory, $113.2 million in land, and $612.4 million in fixtures and equipment. That adds up to roughly $1.5 billion. If you then divide that by the number of outstanding shares of roughly 38 million that equates to about $40 per share in these assets. (To learn more on asset value, check out Testing The Balance Sheet.)

Please note that I have left out other assets such as leasehold improvements and buildings, which total another $692 million. I have also left out debt. Even so, the point here is that $40 is not too far below the $51-per-share range for the current market price, and doesn't even really factor in the company's earnings potential going forward as a standalone! For the record, Wall Street currently expects Longs to earn $2.62 per share in fiscal '08 and $2.97 per share in fiscal '09.

The Bottom Line
I don't like buying stocks simply because I think the company might be a buyout candidate, because its distinctly possible that a deal might never happen. That said, I think that Longs deserves more than a passing glance because as a standalone it appears quite attractive.

To continue reading on this topic, see The Merger - What To Do When Companies Converge.

Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

Rate this Article: Your Rating: Overall Rating: Vote Now!

MORE STOCK ANALYSIS