Retail drug stores are a booming business, fueled by the graying of the population, greater health awareness and expanded insurance coverage. The biggest beneficiary also happens to be the biggest drug store chain in America: Walgreen Co (WAG).
As a play on multiyear health and demographic trends, Walgreen stock should be your investment drug of choice.
Illinois-based Walgreen operates more than 8,200 locations spread among all 50 states, the District of Columbia and Puerto Rico. A major tailwind for Walgreen is the Patient Protection and Affordable Care Act (PPACA), commonly called Obamacare, as retail pharmacies gear up to sell drugs to millions of newly insured Americans who previously couldn’t afford medicine.
Global pharmacy sales are expected to reach $1.2 trillion by 2018, according to a report from research firm Lucintel. A recovering economy, lower unemployment, rising home prices, and greater consumer confidence also should drive sales at Walgreen’s merchandise counters.
Prescription drugs account for about 75% of Walgreen’s sales; the rest is generated by general merchandise, cosmetics, groceries, over-the-counter medications, and myriad household consumables. The company also offers Pharmacy Benefit Management (PBM) services for complicated health treatments. PBM is one of the hottest trends in health care cost containment and should prove a boon for Walgreen in 2015 and beyond, as the company gains greater expertise and clients in the field.
At the same time, Walgreen is following through on a chain-wide remodeling scheme to turn its drug retailing outlets into a one-stop shopping experience for customers. The overhaul is designed to create repeat customers, as well as economies of scale and lower overhead.
Walgreen is revolutionizing the drug store experience, by consolidating products and services under a single roof. For example, the company is creating discrete sections within stores that offer foot products and onsite pedicures.
Walgreen is riding the wave of generic drugs that is following the expiration of more expensive brand name drugs. The company also is aggressively expanding, to stay ahead of its main competitors CVS Caremark (CVS) and Rite Aid (RAD). Over the last few years, Walgreen has purchased complementary outfits such as Alliance Boots, Duane Reade and Drugstore.com.
As it acquires and absorbs competitors, Walgreen is creating an efficient supply chain that holds it in good stead amid today’s fiercely price competitive retail drug business. As Walgreen’s services become increasingly faster and cheaper than competitors, Walgreen stock should go higher.
Walgreen’s Medicinal Earnings
Before the markets opened this morning, Walgreen announced operating results that surpassed Wall Street’s expectations. For the first quarter of fiscal 2015, the company reported earnings of $809 million, for adjusted earnings per share (EPS) of 81 cents, up from $695 million, or 72 in EPS during the same period a year ago.
First quarter EPS beat the analysts’ consensus estimate of 74 cents. Revenue jumped 6.7% year-over-year to $19.55 billion, in line with forecasts. Total same-store sales grew 5.7% on a year-over-year basis.
With a growing network of revamped stores, increasing supply chain efficiencies, and secular health care trends as tailwinds, Walgreen stock is a powerful prescription for growth. The current yield of 2% is icing on the cake and should entice income investors as well.
As of this writing, John Persinos did not hold a position in any of the aforementioned securities.
