REAL CLIENT MANAGED PORTFOLIO
ANALYST: Matt Byford, Brandon Honey, Shivam Khanna, Joe Vaccaro
SUBJECT: Hold 500 Shares of Walgreens
DATE: October 28, 2008
Company Overview
The Walgreen Company (NYSE: WAG), is the second largest drug retailer in the United States behind CVS/Caremark. As of August 31, 2008, there were 6,443 Walgreen stores located in 49 states, District of Columbia, and Puerto Rico. Sales are driven by prescription drugs, non-prescription drugs, and general merchandise.
Portfolio Position
On October 6th, 1999, 1000 shares of Walgreens were purchased for $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 October 27, 2008, RCMP had an unrealized loss of $1,800 or -14.40% at the current market price of $21.40.
Recent News
On October 8, 2008, Walgreens withdrew its $2.8 billion bid for Longs Drugs Stores. CEO Jeff Rein retired on October 10, 2008 and was replaced by interim CEO Alan McNally. Walgreens projected an 8% square footage expansion through 2009 and beyond. It expects to exceed 7,000 stores by 2009, slow organic store growth starting 2011, and operate 13,000 stores in the long run.
Recommendation
We recommend holding the 500 shares of Walgreens. Our DCF valuation suggests that shares are fairly valued. We believe that there is more upside potential than downside potential. Because of uncertainty concerning the company’s CEO position, the recognition of operating leases in the financial statements, and confidence in the market as a whole, we do not feel that there is enough evidence to support a “buy” recommendation. By holding our position, we are avoiding taking a loss with the anticipation that the upside potential will be realized. Walgreens also has a very low correlation with the other RCMP holdings. The generic prescription drug market will remain strong, especially from 2009-2011, as a significant amount of brand name drugs come off of patent.