REAL CLIENT MANAGED PORTFOLIO

ANALYST: Matt Hawk, Roger Hong, Ye Jiang, Prateek Sharma

DATE: Oct 14, 2010

Company Overview

Walgreen Company (NYSE: WAG), is one of the largest drug retailers in the United States along with CVS Caremark and Rite Aid. These three currently occupy approximately 70% of the drug retail market in the US. As of Aug. 31, 2010, Walgreens operated 8,046 locations in all 50 states, the District of Columbia, Puerto Rico and Guam. It employs around 238,000 people.

Portfolio Position

On October 6th, 1999, RCMP purchased 1000 shares of Walgreens at a purchase price of $25.00/share. On September 20, 2006, 500 shares were sold at $49.94/share. Currently, the RCMP portfolio holds 500 shares of Walgreens. As of Oct 17, 2010, RCMP had an unrealized gain of $4,635 or 37.08% at a current market price of $34.27.

Recent News

·  On Oct 13 2010, Walgreens board of directors authorized the spending of $1bn in share buy-backs. The authorization will expire at the end of 2012. The Company previously completed a $2bn share repurchase three years ahead of schedule. The board also declared a regular quarterly dividend of $0.175/share, a 27.3% increase over the year-ago dividend.

·  On Oct 6 2010, Walgreens’ announced the appointment of David J. Brailer, MD, PhD, Chairman of Health Evolution Partners to its board of directors. Brailer, who joins the board as an independent director, becomes the 11th board member.

·  For the month of September 2010, Walgreens reported sales of $5.64bn, an increase of 5.3% from $5.36bn for the same month in fiscal 2010. Duane Reade stores, acquired in April 2010, contributed 2.8% points to the total sales increase for the month.

·  For Q4 2010, Walgreens’ reported an increase in sales by 7.4% to $16.9bn and fiscal 2010 sales reached a record of $67.4bn.

Recommendation

We recommend holding on to our current position of 500 shares. Using DCF and relative value analysis, we believe that the stock is fairly valued in the $28-32 range. Even after accounting for capital leases and adjusting the capital structure accordingly, we find that Walgreens’ is fairly valued. The company has paid consistent dividends since acquisition and has outperformed both the S&P 500 and the Dow Jones Industrial Average during the same time period. However, we do believe that any merger/acquisition activity in the drug retail space could provide an unexpected impetus to the stock price.