The leading U.S. drugstore chain operator Walgreen (WAG) has partnered with the European giant Alliance Boots and AmerisourceBergen Corp. (ABC), one of the world’s largest pharmaceutical service companies, to expand its wings outside of North America as it aims to become the biggest drug store chain on both sides of the Atlantic. More recently, Walgreen has also acquired some of Kerr Drugs’ assets. Through mergers and partnerships, Walgreen seeks to considerably grow its top and bottom line, while exercising strict cost discipline, which would improve its margins. The positive impact of these mergers was evident in the recent quarterly results. So far this year, the company’s shares have outperformed the broader market and due to its bright outlook, Walgreen’s shares could continue to move higher in the coming quarters.
Partnerships and Acquisitions
Its strategic partnership with Alliance Boots continues to pay-off as Walgreen achieved $154 million in the combined synergies in the fiscal year, which is $4 million above the high end of its estimate. Walgreen has signed a 10-year contract with AmerisourceBergen and its full worth over a decade is around $400 billion. This partnership has given birth to the biggest buyer of generic drugs in the world. Earlier in September, AmerisourceBergen officially announced that it will distribute pharmaceuticals to more than 8100 Walgreen stores while the three (AmerisourceBergen, Walgreen and Alliance Boots) would collaborate with each other on the global supply chain. Naturally, AmerisourceBergen would become the primary supplier of generics to Walgreen.
In September, Walgreen also purchased some of Kerr Drug’s assets, including its specialty pharmacy business and 76 retail drug stores. In addition to this, Walgreen also announced long-term partnership with Theranos, following which; Walgreen will provide new “less invasive” lab testing services to its customers. Walgreen currently providing this service in limited stores but will expand it further in the coming years.
Walgreen currently has the fastest growing loyalty program in the world with 85 million people subscriptions. The company can also take advantage of Alliance Boots’ experience of running a successful loyalty program in the U.K for the last 2 decades.
Last month, Walgreen reported its quarterly results in which its earnings rose 86.1% from the same quarter last year to $657 million. This massive growth was mainly due to the method of inventory accounting and the positive impact from the acquisition of stakes in Alliance Boots. However, excluding the one-off items, Walgreen still posted strong growth in terms of adjusted earnings by 26.9% to $702 million or $0.73 per share.
The drugstore giant’s revenue rose 5.1% to $17.94 billion. As a result, the company marginally missed the revenue estimate of $17.95 billion but managed to beat the earnings estimate of $0.72 per share.
In the quarter, Walgreen’s comparable store sales increased by 4.6% and basket size increased by 3.6% while comparable store traffic decreased by 1.9%. Prescription sales, from where Walgreen gets 64% of its revenues, rose 6.1%. During this period, Walgreen filled 203 million prescriptions, which is 8.2% higher from last year.
Why Am I Bullish?
In the current fiscal year, which ends in August 31 2014, Walgreen is eyeing combined synergies of between $350 million and $400 million. In terms of its partnership with Alliance Boots, Walgreen’s CFO Wade D. Miquelon said during the conference call that the company has just scratched the “surface of things that we can do together in the coming years.” And he is likely right.
By 2016, Walgreen is targeting combined revenues of $130 billion, combined operating income of $8.5 billion and $9 billion, combined operating cash flow of $8 billion and total synergies of $1 billion. This sounds ambitious but analysts believe that Walgreen will be able to beat these long term goal. If that happens, then the stock could touch up to $80 per share. This represents around 30% upside from the current price levels, making a compelling buy case for Walgreen.
Moreover, there have been indications of improvement in the broader macroeconomic environment. Firstly, the Affordable Care Act, which could extend healthcare insurance to 29 million previously uninsured Americans in the next 6 years, will also have a positive impact on Walgreen. Secondly, the number of people aged more than 65 years has been growing rapidly; in fact, their growth has been far quicker than the growth of the overall American population. This could translate into healthy prescription volume for the next several years.
Walgreen’s shares have risen by an impressive 63% this year, easily outperforming the broader S&P-500 ETF (SPY) and the Dow Jones Industrial (DIA). The stock is trading more than 23 times its trailing earnings but due to the anticipated growth in its revenues and earnings in the coming years, coupled with positive developments in the business environment, its shares could still go higher.
Walgreen Q4 Results [Pdf File]
Walgreen Q4 Earnings Conference Call Transcript
Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.