Invest in Walgreens; make some green

I’ve written and spoken many times about companies that have gone nowhere over the last 10 years or so based on their stock price. I’ve explained that the poor stock performance was because 10 years ago when people bought the stock, it was way overpriced based on the fundamentals, primarily the valuation ratios. Another good example of this overpaying 10 years ago is a company many know about and use on a regular basis: Walgreens.

Walgreen Co. was founded back in 1901 and is based in Deerfield, Ill. You may have visited one of their 7,650 stores nationwide at one time or another. Employing 177,000 employees, Walgreens — while not the country’s largest employer — is a big contributor to the work force.

Looking back to August 2001, the stock traded around $35/share; today it trades around $34/share — about a 3 percent decline.

However, the earnings per share have increased 272 percent. The company now has a PE of 13.7 compared with an estimated PE of 37 10 years ago. Price to sales comes in at 0.45, about the same as the industry at 0.44. I was really impressed by the price to tangible book value at 2.48, compared with the industry average at 17.4. The low price to tangible book demonstrates how strong the company’s balance sheet is and what a great job management has done over the years. Price to cash flow is now 9.2 compared to the industry average at 10.0.

Investors will receive a 2.6 percent dividend, beating the 10-year Treasury yield of around 2 percent, and the company only uses 27 percent of its earnings to pay out this dividend. While Walgreens' 7.3 percent sales year over year underperformed the industry average of 39.9 percent, the company really did well growing its earnings per share up 23.6 percent year over year when the industry only saw an 8.3 percent increase in its earnings per share.

As I stated earlier, I like this company's balance sheet, which has a current ratio of 1.6 — about the same as the industry at 1.5. When it comes to debt to equity, Walgreens really puts the industry to shame. Walgreens has a debt to equity of 16.3, about one-third the industry average of 50.1. Of that, it appears that Walgreens has locked in some low long-term rates because short-term debt to equity is only 0.08 percent; this compares to the industry short-term debt to equity of 13.0 percent.

Walgreens had a net profit margin of 3.4 percent — slightly better than the industry average of 3.0 percent. Over the last 12 months, the company had a return on equity of 16 percent. While acceptable, it is below the industry average of 31 percent.

The receivable turnover for the last 12 months was 26.7 times — slightly better than the industry average of 23.5 times. The inventory turnover looks concerning for Walgreens, coming in at 6.9 times for the last 12 months when the industry average turned over inventory 18.7 times over the same period. I checked the growth in inventory and found that while the inventory did grow at roughly 3 percent year over year, sales did increase by 7.3 percent over the same time period. As an investor, one does not want the inventory to increase faster than sales because this could cause write-downs of that inventory, which would hurt future profits.

The mean of 19 analysts are looking for earnings per share of $2.99 for the year ending August 2012. While August 2012 is now less than a year away, using a multiple of just 15 times earnings would put the stock price around $45, approximately a 28 percent return including the dividend. Investors should also keep in mind that Walgreens has a five-year dividend growth rate of 21 percent and currently pays 90 cents per year. If the next five years the company grows the dividend again by 21 percent, that would peg the dividend at $1.09 per share. If you do the math, in addition to any possible stock appreciation, the dividend yield will climb to 3.2 percent if smart investors were to buy the stock at $34 per share.

Over the last four quarters, the company beat the earnings per share estimate three out of four times. The best quarter was November 2010 when the company beat the estimate by 8 cents a 15 percent beat.

Walgreens also has a PEG ratio of 1.14, adding to the positives of investing in this company. Don’t think this is a bad investment based on the stock loss over the past 10 years — look at the fundamentals today and think about where this stock could be over the next 12 to 24 months.

Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.