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Analyzing Barry Rosenstein’s Top Holding: Walgreens

February 24, 2015 | About:

Jana Partners is an investment manager specializing in event-driven investing founded in 2001 by Barry Rosenstein. Jana typically applies a fundamental approach to identify undervalued companies that have one or more specific catalysts to unlock value. In certain cases, Jana can be the instrument for value creation by becoming an activist shareholder. Jana manages approximately $11 billion in investments and is located in New York. Walgreens Boots Alliance (WBA) is the largest holding in Jana Partners’ portfolio. As of the last quarter, the fund was holding 13,750,000 share of Walgreens. Here’s look at the company business in detail.

Walgreens, together with its subsidiaries, operates the largest drugstore chain in the United States with net sales of $76.4 billion in the fiscal year ended August 31, 2014. Walgreens provides services to customers with convenient, Omni-channel access to consumer goods and services, pharmacy, and health and wellness services in communities across America. Walgreens provide its services through drugstores, as well as through mail, telephone, online and our mobile application. As of August 31, 2014, Walgreens operated 8,309 locations in 50 states, the District of Columbia, Puerto Rico and U.S. Virgin Islands. On December 31, 2014, Walgreens completed acquisition of Alliance Boots. Alliance Boots is a leading international, pharmacy-led health and beauty retailing and pharmaceutical wholesaling and distribution business. Alliance Boots run their businesses in 11 countries and operated more than 4,600 health and beauty retail stores, of which more than 4,450 had a pharmacy, with a growing online presence.

Last quarter, Walgreens posted solid results across both its pharmacy and retail product business. Strong holiday season and good cost control across the enterprise helped the company’s result. For the full quarter sales were a record $19.6 billion, up 6.7% from 18.3 billion a year ago. Adjusted operating income for the quarter was $1.14 billion up 3.5 % from $1.1 billion in the first quarter 2014. First quarter adjusted EPS was $0.81, up 12.5 % from $0.72 in the same quarter last year. Segment wise, the company’s retail product business saw a total comparable sales increase of 1.5% year-over-year helped by a 4.2% increase in basket size. Pharmacy segment also did well with the company’s prescription sales growing 9%.

On the Pharmacy side, the company’s strategy is to focus on wining & gaining share with high-value seniors through preferred relationship with Medicare Part D plans. While this business carries lower margins than the rest of the company’s script business, it remains quite attractive as it drives incremental revenues and gross profit dollars. This strategy seems to be working and the company’s market share in retail pharmacy increased 10 basis points last quarter.

The company is also making good progress in terms of driving its front end or retail product comp sales. The company’s focus is to drive profitable growth and achieve the right balance between sales and margin. There are three key elements of this strategy. First one is to focus on enhancing its product mix towards more upscale retail products to drive higher margins. Second one is to drive supply chain efficiencies by removing excess costs and thereby improving overall store productivity. And third is to leverage its Balance Reward loyalty program to drive valuable insights that will allow it to better target its promotional investments. This strategy is beginning to pay dividends and last quarter marked the third quarter in a row where the company saw year-over-year improvement in retail product gross margin.

Going forward, the company is expecting the strength it saw in the last quarter to continue for rest of the current fiscal year (ending Aug). For FY2016 the company goal is to achieve $1billion in cost saving and post $4.24-$4.65 in EPS. Longer term the company aims to take Walgreens global. The recently completed merger of Walgreens and Alliance Boots is a step in the right direction.

Walgreens is trading at 17.75 times FY2016 (ending Aug) EPS. According to sell side estimates, the company’s EPS is expected to grow 12% in the current fiscal year and 21% next fiscal year. The company has a dividend yield of 1.70%. Out of 21 analysts covering the company, five are positive and have buy recommendations, 15 have hold ratings and one has a sell rating. Given the company’s good growth prospects and reasonable valuations, I recommended buying the stock.

About the author:

Growth at reasonable price (GARP) investor.

Rating: 0.0/5 (0 votes)


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