Ever since Walgreen (NYSE:WAG) decided to end its relationship with prescription benefits manager Express Scripts (NASDAQ:ESRX) in 2011, the stock has taken a hit. Now that Walgreen is no longer part of Express Scripts’ pharmacy network, can this company get on the right track in time for its third-quarter earnings announcement? Tuesday morning brought some telling sales data on this front, so let’s find out.
With over 110 years in the business, Walgreen is one of the largest and best established drug retailing chains in the U.S. Through the years, the company has changed much since the times when it sold lunch and malted milkshakes (which the company claims it invented) in its drug stores. Walgreen employs 176,000 across 8,300 North American locations. In FY 2011, the company brought in $72.18 billion in total sales.
Walgreen is a member of the Drug Stores industry, which is made up of 11 companies. Of these, Walgreen Co. is second only to CVS Caremark (NYSE:CVS) in terms of market capitalization. This company also stands out in terms of its 3% dividend yield, which is the highest in the industry, and its return on equity, which is second highest in the industry.
But, when it comes to Price/Earnings to Growth ratio, earnings growth, sales growth and long-term growth rate, this is a middle of the road company. Walgreen’s biggest competitors are CVS, Rite Aid (NYSE:RAD) and Wal-Mart (NYSE:WMT). Of these four companies, Walgreens has the highest gross margin, the third highest operating margin but the lowest sales growth.
May Sales Rundown
Before the opening bell today, management announced that the company’s total sales for May as well as the third quarter declined due to increased competition from new generic drugs. Compared with May 2011, last month’s sales declined 1.6% to $5.98 billion.
Additionally, May same-store sales dropped 5.8%. The company has also been hurting lately because it is no longer part of the Express Scripts Inc. pharmacy network. Walgreens’ next earnings announcement is scheduled for before the opening bell on Tuesday, June 26.
The analyst community expects the company’s top- and bottom-lines to both contract by 3% in the third quarter. Walgreen’s has a mediocre track record of beating analyst earnings estimates; while the company was able to pull off earnings surprises in three of the past four quarters, it was only in the single digits.
Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. Over the past 12 months, this company has steadily declined in my ratings system; this time last year, WAG was an A-rated stock. Since then, the company has posted a series of disappointing earnings announcements, so Walgreen’s has been hit in terms of sales growth, earnings momentum and its track record of topping earnings surprises. Walgreen’s is also shaky in terms of earnings growth and analyst earnings revisions; its only areas of strength are its operating margin growth, cash flow and return on equity.
WAG receives a C for its Fundamental Grade and an F for its Quantitative Grade (which measures current level of buying pressure for the stock).
Due to its shaky fundamentals and abysmal level of buying pressure, I strongly recommend that you stay away from this stock in the meantime.
Recommendation: Strong Sell
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