The Walgreen prescription for future success lies in the partnerships it has forged in the past year, giving the drug retailer a world-wide presence and powerful drug-buying clout.
By teaming up with Alliance Boots, a closely held European drugstore chain based in Switzerland, as well as with drug wholesaler AmerisourceBergen, of Valley Forge,Pa., Walgreen aims to lift sales, slash costs and boost earnings and margins.
Deerfield, Ill.-based Walgreen (WAG), which operates the Walgreens drugstore chain, should also benefit from macroeconomic developments such as the Affordable Care Act, which took effect in early October and aims to give an estimated 29 million previously uninsured folks access to health care by 2019. Moreover, prescription volumes are expected to rise along with the aging baby-boomer population: The number of Americans aged 65 or older is rising three times as fast as the overall population.
Initially skeptical when Walgreen agreed to pay $6.7 billion for a 45% stake in Alliance Boots in June 2012, with an option to buy the rest by 2015, investors have warmed to the deal. It is the biggest in Walgreen history, dwarfing its $1.1 billion purchase of Duane Reade Holdings in 2010. By 2016, Walgreen projects the combined companies will generate $130 billion in revenue, compared with the $72 billion Walgreen reported in 2012. In addition, it expects annual operating income of $8.5 billion to $9 billion, $8 billion of operating cash flow, and cost savings of $1 billion.
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Since the start of the year, Walgreen shares have jumped more than 60%, to the $60 range.
“There still is decent value if you believe in the targets,” says Edward Su, research analyst at Thornburg Investment Management in Santa Fe, N.M., which owns Walgreen shares in mutual funds it manages.
Mr. Su is betting Walgreen will exceed its financial goals, especially in the costs it expects to wring out, and could earn $5.50 or $5.75 a share in fiscal 2016. In that case, its stock could hit $77 to $80 based on an average multiple of 14 times earnings. That prospect, combined with a current dividend yield of 2.2%, makes for a compelling investment.
Bolstering investors’ confidence is the presence of Stefano Pessina, an Italian billionaire who is executive chairman of Alliance Boots and known for his skill in integrating companies. Following the merger of Pessina’s Alliance UniChem and the U.K.’s Boots Group in 2006, the synergies proved three times greater than what had been anticipated.
The 10-year distribution agreement with drug wholesaler AmerisourceBergen to supply branded and generic products, launched in early September, should also enhance pricing and margins, as it triples the company’s buying power.
Walgreen could be just what the doctor ordered for investors with a long view.
Date: November 3, 2013