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Time To Go Long On Longs

Posted: Aug 08, 2007 11:32 AM by Glenn Curtis

Tickers in this Article: RAD, CVS, WAG, LDG

I am generally a big fan of drugstore stocks. Drugstores are in a unique position to profit from the growing demand for pharmaceuticals as well as from the public's increased willingness to shop in these stores for everyday goods such as milk, cereal and snacks.

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With that in mind one company in the group deserves some attention, Longs Drug Stores (NYSE:LDG).

By The Numbers
Longs operates 492 locations and has a big presence on both the West Coast and Hawaii. Although very few people seem to be paying the company much mind, it has been clicking out some pretty decent numbers.

Just this past week the company reported that its July same store sales increased 1.7%. And, although its true that this number falls a little bit shy of the improvements that CVS Caremark (NYSE:CVS) and Walgreen (NYSE:WAG) turned in (5.2% and 7.2% respectively), it was better than other stalwarts in the group such as Rite Aid (NYSE:RAD), who generated comps of 1.6%.

Longs' results are fairly consistent with industry trends, and are, I think, proof of its ability to thrive despite the recent spate of lower-margin generic introductions into the marketplace.

Long-Term Plans for Success
Another thing I like about Longs is that, rather than try to open up new stores at break neck speed like many of its larger competitors, it's focusing its efforts on closing underperforming stores. As part of its efforts to boost margins it plans to shutter 31 stores in fiscal year 2008. And, in case you were wondering, it plans to tag on just 30 to 35 new stores in fiscal 2008. Also, looking out a little longer term, the company anticipates growing its store base at about a 7% compounded rate per year for the next five years, which I think is very reasonable.

Its stock buyback program is worth a mention as well. During Q1 the company bought back about 56,000 common shares at an average price of $50.97. Going forward, I expect the company to reduce its total share count and buy back more stock as it still has board authorization to spend another $73 million on repurchases, as of the end of Q1.

The Acquisition Wild Card
Because Longs is a fairly consistent operator with reasonable growth plans, and because it has carved out a nice niche for itself in upscale areas along the western United States (particularly the Northern California region), I suspect that other larger players looking for an edge over the competition might be interested in scooping up the company.

To be clear, I have no information that a deal is in the works. However, to me it makes sense that one could be in the mix. If nothing else, a potential buyer would be buying about $21 per share in pretty hard assets, never mind what the value of the ongoing business would be worth! (For a larger perspective, see The Merger - What To Do When Companies Converge.)

The Bottom Line
As things stand now, Wall Street expects the company will earn $2.55 per share for the fiscal year ending January 2008, and $2.84 per share in fiscal 2009. That implies an expected growth rate of about 11.4%, which is pretty attractive.

As a standalone, I think Longs is a good value, and the potential for an acquisition is simply the icing on the cake. These factors combined make the stock worthy of further research for investors looking for long-term success.

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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.

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