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Companies with desirable investment characteristics can sometimes see their stock go on sale if they suffer temporary bad news. But what if these negative factors aren’t temporary? The selection of Walgreen Company represents an opportunity to study this question.

Walgreens is the second-largest retail drugstore chain, behind CVS Caremark and ahead of Rite Aid. As of Feb. 28, the firm was operating 6,678 stores in 49 states and Puerto Rico. The stores sell prescription and nonprescription medications, plus general merchandise such as candy, convenience food, household items, greeting cards, photofinishing, seasonal items, and personal and beauty care products.

The Health and Wellness division runs 701 Take Care Clinics, either in an existing Walgreens store or at a worksite health center on behalf of employers. Walgreens also operates 10 specialty pharmaceutical centers. In the fiscal year ended Aug. 31, 2008, prescriptions accounted for 64.9 percent of the firm’s sales of $59 billion.

Walgreens has had a history of strong, consistent growth, a leading position in its industry and a strong balance sheet with little debt. When selected as the Undervalued Stock, the company had enjoyed annual earnings growth of 15.5 percent over the previous five years and 16.5 percent over the previous 10 years. Walgreens’ stock price fell 17.6 percent on Oct. 1, 2007, however, after the company announced disappointing results for the fourth quarter ended Aug. 31, 2007.

Management attributed the poor quarterly earnings to temporary issues. These included higher expenses in several categories and a drop in profit margins for generic drug sales related to when certain medications came on the market as their brand-name counterparts lost patent protection.

The Editorial Advisory and Securities Review Committee agreed with management’s assessment of the quarter and believed the company would resume its strong historical growth. The committee also liked the firm’s strategy of transforming itself from a conventional drugstore chain to a health care company by expanding in nonretail sectors with high growth potential. In August 2007, Walgreens spent $850 million to purchase OptionCare, a specialty pharmacy provider. The company also acquired Take Care Health Systems to enter the emerging in-store clinic market.

The past 18 months have brought slower growth, however. Sales for fiscal 2008 increased 98 percent, and they were 6.8 percent higher for the first six months of fiscal 2009. Medication sales declined because Americans reduced doctor visits and medication use in response to the recession. Sales growth was also affected by the continuing trend of branded medications converting to lower-priced generic drugs.

On this slower base of sales growth, Walgreens has had problems keeping expense growth in check. In response the company has replaced much of its senior management team, including its CEO, and initiated several programs to become more efficient and consumer-focused. These programs include reducing how many items are sold in its stores, cutting $1 billion in costs and planning for a slowdown in organic sales growth to 5 percent from 9 percent a year. The company expects to conclude these actions by 2011.

At a recent price of $31.43 plus cumulative dividends of $0.62, a share of Walgreens over the past 18 months has lost 14.1 percentAlthough this loss fails the goal that an Undervalued Stock return 20 percent in 18 months, it’s far better than the 41.6 percent loss for the Standard & Poor’s 500 index during this time.

For more information, contact Rick J. Hans, Divisional Vice President of Investor Relations, Walgreen Company, 200 Wilmot Road, Deerfield, IL 60015. Website: www.walgreens.com.

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This entry was posted on Monday, July 27th, 2009 at 1:31 pm and is filed under Dental Care & Health Care. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.