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As Walgreens Stock Goes on Sale, Is CVS Now the Better Buy?

Some of the earlier difference in valuation has to be based on the assumption that Walgreens would do a tax inversion. But some was also based on hope for synergies in the Alliance Boots merger.

Still, over the next year Walgreens is going to be a much more complicated company. The merger will create a mixed executive suite -- several Alliance executives will take prominent roles in the new company -- while CVS will remain undisturbed.

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Even if you believe that Walgreens' redesign is going to work, and that it's going to result in customers staying longer and buying more non-drug items, the stock will likely be pulled down by euro-anxiety surrounding Ukraine.

While all this may result in a stronger Walgreens, the merger will take time to jell, and for now the stock has further to fall.

At the time of publication, the author was long WAG, although positions may change at any time.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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TheStreet Ratings team rates WALGREEN CO as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

"We rate WALGREEN CO (WAG) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth, compelling growth in net income, largely solid financial position with reasonable debt levels by most measures and solid stock price performance. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 4.3%. Since the same quarter one year prior, revenues slightly increased by 5.9%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • WALGREEN CO has improved earnings per share by 15.4% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. During the past fiscal year, WALGREEN CO increased its bottom line by earning $2.56 versus $2.42 in the prior year. This year, the market expects an improvement in earnings ($3.35 versus $2.56).
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and greatly outperformed compared to the Food & Staples Retailing industry average. The net income increased by 15.7% when compared to the same quarter one year prior, going from $624.00 million to $722.00 million.
  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 36.85% over the past year, a rise that has exceeded that of the S&P 500 Index. We feel that the stock's sharp appreciation over the last year has driven it to a price level which is now somewhat expensive compared to the rest of its industry. The other strengths this company shows, however, justify the higher price levels.
  • WAG's debt-to-equity ratio is very low at 0.23 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Despite the fact that WAG's debt-to-equity ratio is low, the quick ratio, which is currently 0.61, displays a potential problem in covering short-term cash needs.

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