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Analyst Blog

On Apr 17, we reaffirmed our long-term Neutral recommendation on Walgreen Co. (WAG - Analyst Report) following the mixed second-quarter fiscal 2013 results. While the last quarter results reflect a definite improvement over the past few quarters, the Zacks Rank #3 (Hold) stock is still plagued by challenges.

Why Neutral?

On Mar 19, Walgreens reported adjusted earnings per share of 96 cents, significantly higher than the year-ago earnings per share of 88 cents, edging past the Zacks Consensus Estimate by a penny.

As reported earlier, total sales came in at $18.63 billion, down 0.1% year over year and trailing the Zacks Consensus Estimate of $18.91 billion. However, the dull results can be attributed to one extra day of the leap year in Feb 2012. Moreover, the increasing returns of Express Scripts Holding Company (ESRX - Analyst Report) customers should improve sales results going forward.

Keeping perfectly in line with its strategy of long-term growth, Walgreens inked a 10-year deal with AmerisourceBergen Corporation (ABC - Analyst Report), effective Sep 1, 2013, to improve its global pharmaceutical supply chain for branded as well as generic drugs. In addition to margin expansion and bottom-line accretion, the contract between these two stalwarts will enhance equity alignment of Walgreens, allowing both the companies to participate in joint value creation.

Walgreens Balance Rewards loyalty program is also gaining traction. We also believe that investors may look forward to rewards in the form of considerable share repurchases with optimism.

On the flip side, Walgreens’ ability to win back its previous customers remains an overhang. Integration challenges surrounding the Alliance Boots deal is another cause of concern. The tussle for market share with CVS Caremark (CVS - Analyst Report) is another headwind. To add to the challenges, the macroeconomic environment remains unyielding.

Thus, we prefer to remain on the sidelines for Walgreens. However, CVS Caremark, carrying a Zacks Rank #2 (Buy) is worth considering.

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