WAG - Walgreens

[Viking]

Walgreens certainly has sold off aggressively the past few months. The company is going through what looks to be a messy divorce with Express Scripts, a managed care provider, that respresents about 8% of WAG's revenue. Both companies have made presentations at investor conferences lately so it is possible to get both perspectives (see below for links). There is still a chance that WAG and Express Scripts may strike a deal; this looks to me to be a low probability event given how negative WAG is portraying Express Scripts (basically saying they are unethical SOB's).

 

WAG estimates that the loss of the Express Scripts business will impact earnings by (at most) $0.20/share next year; from this new base they will then move forward. Too many moving pieces to deally know how much WAG's profitability will be impacted if they lose the Express Scripts business and this is likely why the shares are selling off so dramatically.

 

Share Price = $31.22

EPS est = $2.94/share; PE = 10.6

Dividend = $0.90/share = 2.9% yield

 

WAG has a dominant market position and appear to have solid management that is also shareholder friendly. They have taken on some debt in recent years to buy back shares; total debt looks quite manageable.

 

Walgreens: investor.walgreens.com/events.cfm

Express Scripts: phx.corporate-ir.net/phoenix.zhtml?c=69641&p=irol-investorinfo

[dcollon]

Announced this morning:

 

Express Scripts and Walgreens Announce New Pharmacy Network Agreement

Thursday, July 19, 2012 08:00:00 AM

 

 

Express Scripts (NASDAQ: ESRX) and Walgreens (NYSE: WAG) (NASDAQ: WAG) today announced the companies have reached a multi-year pharmacy network agreement that includes rates and terms under which Walgreens will participate in the broadest Express Scripts retail pharmacy network available to new and existing clients. The companies are not disclosing the terms of the new contract.

 

Walgreens will be part of the broadest network of pharmacies available to Express Scripts clients, as of September 15, 2012. Express Scripts will work to ensure a smooth transition for those plan sponsors who will want to include Walgreens pharmacies in their network.

 

"As I've said, we are in the business of providing a broad range of pharmacy, health and wellness services to help meet the needs of all of our customers,” said Greg Wasson, president and CEO of Walgreens. “I am pleased that Walgreens and Express Scripts have been able to reach an agreement that works for both parties and is consistent with our company’s principles. This agreement is good for our shareholders, our employees and the patients and communities we serve every day. We look forward to once again filling prescriptions and offering our health and wellness services as part of the Express Scripts network."

 

“We are happy to include Walgreens in our broadest network of pharmacies and we are pleased to reach an agreement to do so,” said George Paz, chairman and CEO of Express Scripts. “Our business model is based on strong alignment with our plan sponsors -- employers, health plans, unions and government health programs -- providing them with a clinically sound and economically responsible pharmacy benefit.”

 

The broadest Express Scripts network now offers more than 64,000 pharmacies nationwide, including Walgreens, providing a broad array of quality pharmacy care options.

 

 

[worldaccordingtoGARP]

I'm pretty new here, but just wanted to remark on this stock considering its earnings day.  I'm surprised there hasn't been more discussion on Walgreen's.  Since early last year, Markel has accumulated a 2.1 million share stake in the company and Walgreen's itself has some interesting elements, one of the most intriguing of which is Steffano Pessina's position as both the single largest shareholder and a member of the Board.  Pessina is a quiet, but brilliant capital allocator, who grew his family's small pharmaceutical wholesaler into the largest pharmacy in Europe and a substantial stake in Walgreen's.

 

As I was reading The Outsiders, Pessina was one of the people I researched who seemed to share many common traits with the 8 CEOs discussed.  He is looking to make money off of his ownership interest in the business, rather than via salary, and he is not scared of making significant acquisitions, and using leverage in the right contexts.  In fact, his fortune was built through a series of acquisitions (http://www.ft.com/intl/cms/s/0/a8ed7a6c-bc60-11e1-a836-00144feabdc0.html#axzz1zTucyach) and his shareholders had been rewarded alongside him.  One twist was when Pessina partnered with KKR to buy out all of Alliance.  This was at the peak of the markets prior to the Financial Crisis and while Pessina/KKR invested in Alliance, results suffered a bit with the economy.  This presaged the need to either IPO or find a strategic buyer, and Walgreen's, as is even clearer in hindsight, was the perfect fit.

 

Walgreen's is run by an interesting fellow in his own right: Gregory Wasson. Wasson was a pharmacist himself, who started his career at Walgreen's (http://www.dallasnews.com/business/headlines/20120707-walgreens-wasson-unafraid-of-risky-moves.ece), met his wife there, his brother works there, basically just a Walgreen's guy through-and-through.  The company has a history of managing its balance sheet conservatively, and growing slowly and steadily through smart acquisitions (like buying an overlevered Duane-Reade during the crisis) and efficient operations.  The Chairman of the company is James Skinner, who many of us are familiar with as the guy who led the resurgence of McDonald's a decade ago.

 

Collectively, Pessina, Wasson and Skinner are overseeing Walgreen's attempt to create the first integrated global pharmacy and drug distribution business.  An instrumental step was this year's acquisition of a stake, and partnership with Amerisource Bergen for drug distribution.  In a recent Teva analyst presentation, the company's CEO, Jeremy Levin called the Walgreen's/Alliance/Amerisource deal one of the most transformative happenings in global healthcare in years (http://wsw.com/webcast/canaccord10/teva/).  The global capability to buy and distribute generics (and medicines generally) will completely change how supply chains work, and could end up compressing pricing in the US, feeding directly into Walgreen's margins (which already benefit tremendously from the shift from patented treatments to generics).

 

Walgreen's bought it's Alliance-Boots and Amerisource stakes in very interesting ways: paying fair multiples, with a company option to buy more down the line.  With Alliance, Walgreen's took a 45% stake, taking on KKR and Pessina as big holders (Pessina ownd 8% before putting another $5 million of his own cash into the stock this summer) and both Pessina and KKR have board seats.  Walgreen's/Alliance deal is already realizing synergies ahead of schedule (per today's earnings release) and there's little reason to believe the option to buy out the remainder won't be exercised.  At that point, Pessina would own another ~10-12% of Walgreen's stock.

 

Anyway, there is a whole lot more to Walgreen's than this, but I just wanted to highlight the management that is overseeing the company's attempt to go global, along with an incentive structure nicely aligned with shareholders.  Anyone else out there dig into this over the past year?  It's definitely not cheap right here, as it was over the past year, but it's not too expensive either.