Although retail isn't in the best shape it's ever been, it does seem like it's on the road to recovery. The space has an enormous amount of potential in the long run, thanks to our inclination to spend. In addition, the demand for pharmaceuticals is likely to increase over time - both for demographic reasons and because many illnesses can now be treated with pharmaceutical and over-the-counter products. In short, these are some of the primary reasons why I am so upbeat on Walgreen (NYSE:WAG). But does it make sense to get in on these shares now? Let's take a look.
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Time to Fill the Prescription for WAG?
The first thing that stands out to me is the drugstore chain's fourth-quarter results, which were announced last week. In spite of a difficult environment, it managed to earn 44 cents a share. This represented drop from the 45 cents per share it put up last year, but it was a nickel better than the 39 cents that analysts had been expecting.
This is big because better-than-expected results can draw a lot of attention. In fact, I think that institutions looking to dress up their portfolios may pay particular attention to this. Plus, Walgreen's stock has been performing as well. It's trading right near its 52-week highs.
From a price-to-expected earnings perspective, Walgreen is, for lack of a better word, reasonable. WAG currently trades at about 16.7 times the 2010 estimate, and the company is expected to grow in excess of 14% per annum in the next five years. The stock isn't exactly cheap, but 14% growth is pretty big for a company of this size. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)
Incidentally, I think the company's size is a plus that should be addressed, too. With more than 7,000 stores around the country, I think the company has an opportunity to build some solid brand loyalty. Competitor CVS is similar in size in terms of store count, while Rite Aid (NYSE:RAD) sports just over 4,800 stores.
The Big Threats
If the economy were to reverse course or to stall, that would clearly have a negative impact on the company. I also think that well-known discount firm Wal-Mart (NYSE:WMT) should be viewed as a big threat in the future.
Bottom Line
I like Walgreen and think the stock makes sense right now. A new high, if it happens, could attract attention, as could the company's recent earnings beat. I see the stock trading to the mid-$40s within the next six to 12 months. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks)
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