Walgreen Feels Wal-Mart Pressure

While maintaining a pristine balance sheet, management continues Walgreen Co.'s (WAG - Analyst Report) new store expansion strategy. However, pharmacy profits are being pressured due to lower reimbursements on some generic drugs and additional pricing pressure from Wal-Mart (WMT - Snapshot Report), which has entered the retail generic marketplace.

In response, management is trying to better utilize the existing store space and drive increased customer traffic through its stores by offering new services like convenient care clinics. The Hold rating on Walgreen is maintained.

Near term, Walgreen is experiencing higher expenses and increased demand for low-margin prescription mail services and the new Medicare prescription drug program. Any earnings disappointment may have an exacerbated effect, due to the stock's premium valuation.

Walgreen is currently selling at 17.3 times trailing 12-month EPS. Having declined from an unsustainable 60 P/E in late 2000, the stock settled in the 22 to 34 multiple range for four fiscal years (FY2003 through FY2006). However, when Wal-Mart aggressively entered into the retail generic drug marketplace, Walgreen's P/E multiple was compressed to the 21 to 24 range.

Then following the disappointing earnings report of the fiscal fourth quarter of fiscal 2007, the stock subsequently traded down to a 16 P/E. The target price of $38.75 is based on an 18.5 P/E on trailing 12-month earnings.

Read the full analyst report on WAG

Read the full analyst report on WMT