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Walgreens Stock Pick

When you think of truly great companies, which ones come to mind? General Electric? Citigroup? Ford? Well, if Walgreens didn't pop in your head, you should probably add it to the list.

Walgreens was founded in 1901 with just one pharmacy measuring 50 feet by 20 feet. Today, the company has over 3000 stores in the United States and Puerto Rico and has plans to open its 6000th store by 2010. This has helped put Walgreens in the #1 position in the drug store industry.

Walgreens is the symbol of good corporate culture. The company is active in community affairs, takes great pride in its employees, and was even one of the first companies to institute a profit sharing pension plan. Good ethics has built a solid foundation and good employee retention for this company.

The company generates about 60% of its sales through prescription drugs but photo processing, groceries, cosmetics, and cards are quickly improving their top line. One of the nice things about Walgreens is that they produce so many generic products on their own and place them next to the name brand on the shelves. This allows the customer to buy the Walgreens brand product for far less than the name-brand one.

What I Like About This Stock

  1. Solid growth - This company has continued to not only grow its revenues by expanding stores but by also improving their same-store sales. July same-store sales were up 11%
  2. Great long-term performance - Walgreens has performed wonderfully over the last 25 years. In fact, it has even outperformed the likes of Intel. Very impressive.
  3. Homespun growth over acquisition growth - By building their own stores rather than acquiring new ones from other companies, Walgreens enables itself to properly pick its locations in high-traffic areas. While they have less stores than rivals CVS and Rite Aid, their sales put them #1 in their industry.
  4. Consumer loyalty - Walgreens has incredible consumer loyalty and they're making steps to improve that even further. For example, they now offer a "free film for life" disposable camera that helps build return customers for their one-hour photo labs.

What I Don't Like

  1. Fairly high PE ratio - The company is trading at 34.7x this year's earnings. That will prevent the stock from reaching new highs and will hold it back for a little while...but not forever.

Overall, I think Walgreens is a great addition to anyone's portfolio. It is a strong, solid company that won't have accounting scandals or file for bankruptcy. I see this stock reaching $40.00/share again within the year and from there, continuing with steady 15% growth.


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ron root said:

Now is a good time to buy. And I would suggest selling in few years when the changes being implemented have an effect on performance. It's the old story of slashing payroll costs by getting rid of those who have been with the company for many years, and have worked their way up to management from stocking shelves at the stores. They're being terminated under the guise they're not qualified for the positions they hold because they have no degree. Then they hire another with a degree for less, and very less benefits (vacation,etc.). The person they let go knows everything they're responsible for because they've done every job under them. The new hires have no or little experience in the areas they're now responsible for. This will not have an immediate negative effect, and will take time to show up in the financials. Those now in charge have ripped the soul from the company by making all the employees fear each day ill be their last day of employment. The CEO promised to save a billion dollars in a year. They took away the christmas bonus from full time store employees (about $4 a week), and gave the CEO a six million dollar raise. Not a good moral move. When the Walgreens family was in charge their doors were always open to any employee. Now the executive officers have a remodeled building with state of the art security for their protection. New management hires are telling employees that have been with Walgreens for 20 or more years that they don't know what they're talking about when trying to give input about operations. This is a recipe for disaster that will take its toll in later years because Walgreens is a revenue generating machine at present. When you have an organization as large as Walgreens who's every employee is demoralized, and wondering how long they'll have this job that was once a career. It's only a matter of time!

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