For long-term health, try dose of Walgreen

Shares of Walgreen ($36; NYSE: WAG) have come under pressure in recent months, reflecting a slowdown in sales because of a weakening economy and intensifying competition. However, Walgreen’s long-term prospects remain appealing, and the stock is attractively valued. Walgreen is a Long-Term Buy.

Big, strong, and healthy
Walgreen is the largest U.S. drugstore chain as measured by revenue and the second-largest based on store count. The company operates more than 6,200 stores in 48 states and Puerto Rico and plans to boost the count to 7,000 by fiscal 2010 ending August. Walgreen sees long-term potential for about 13,000 U.S. stores.

Prescriptions generate about 65% of total sales, with the rest coming from general merchandise. In fiscal 2007, both pharmacy and general-merchandise sales growth outpaced the industry average, and Walgreen increased market share in nearly all of its core categories. 2007 represented the company’s 33rd consecutive year of sales growth. Walgreen has expanded beyond pharmacy services with in-store health clinics and a managed-care division.

Acquisitions pick up
Walgreen has not traditionally been an aggressive acquirer, relying mostly on such strategies as building new stores, entering new markets, and improving customer service. The company has also invested heavily in technology enhancements that improve pharmacy efficiency and reduce costs. But in recent months, Walgreen has made several deals that will broaden its health-care offerings.

In September, Walgreen paid $850 million for OptionCare, which specializes in infusion drugs such as cancer treatments. The deal was the largest in Walgreen’s history and made the company the nation’s largest independent specialty pharmacy. The specialty-pharmacy market is growing much faster than the overall pharmacy market. In March, Walgreen agreed to acquire I-trax and Whole Health Management, which operate health centers at corporate offices, paying $260 million for I-trax and an undisclosed amount for Whole Health. After those deals close, Walgreen will operate more than 500 worksite and retail health centers in 40 states, including its in-store clinics.

Solid growth outlook
The weakening economy and increasing competition have slowed growth of both pharmacy and general-merchandise sales in recent months. Walgreen has also cut back on advertising spending to reduce expenses, and some investors worry about the affect on market share. However, the company continues to offer customers more convenience and new services. Expanded store operating hours, a growing number of free-standing stores with drive-through pharmacies, and in-store digital photo-finishing labs should boost customer traffic.

The stock looks cheap relative to its solid growth outlook. At 15 times estimated year-ahead earnings of $2.36 per share, Walgreen trades well below its five-year average forward P/E of 23. Consensus estimates project per-share-profit growth of 9% in fiscal 2008 ending August and 12% in fiscal 2009, targets the company should be able to beat. An annual report for Walgreen Co. is available at 200 Wilmot Road, Deerfield, IL 60015; (847) 914-2500, www.walgreens.com.