Wal-Mart Stores, Inc. (WMT), Walgreen Company (WAG) and Dollar General Corp. (DG): What Should You Buy?

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Walgreen Company (NYSE:WAG) reported a fairly solid quarter. When compared to other retail opportunities, this company possesses something that may not be found elsewhere.

Earnings highlights and analysis

The company reported $17.7 billion in sales for the quarter. The company grew sales by 3.2%. The company reported 22.9% year-over-year growth in operating income. It also came out with 29.3% year-over-year growth in adjusted net earnings. The company’s adjusted diluted EPS grew by an astounding 18.1% year-over-year in the quarter.

Walgreen Company (NYSE:WAG)

Walgreen Company (NYSE:WAG) was able to grow sales by a modest amount, but with better management of cost the company was able to generate the significant improvements in earnings. The company has a net profit margin of 2.9%, and could see a lot of improvements in net income, with a slight improvement on margins.

The company reported $0.85 in earnings per share for the quarter. Its performance missed analyst expectations. However, if investors are willing to wait, the future could be bright for this company. Walgreen Company (NYSE:WAG) plans on growing revenue by 80.5%, and operating income by 131%, through 2016. The company hopes to do this by rapidly increasing the number of stores it currently operates. It plans to borrow money in order to grow its business.

The company currently has $5.3 billion in debt, but plans to increase that debt to $11 billion in order to sustain higher rates of growth. Because the company has a working business model, I believe that this strategy of borrowing and opening stores will be a success.

Walgreen Company (NYSE:WAG) currently trades at a 14.8 earnings multiple. The multiple is reasonable when considering the 20% to 25% growth rate the company is projecting. Also, Walgreen pays out investors a 2.5% dividend yield, giving income-oriented investors a compelling investment opportunity. Growth-oriented investors could meet a doubling goal by five years. Value investors would be buying this company at a discount relative to growth. Overall, Walgreen Company (NYSE:WAG) is a compelling investment opportunity despite the slight miss on earnings.

Retail at a larger scale

Investors should also consider Wal-Mart Stores, Inc. (NYSE:WMT). The company’s every-day-low-pricing business model will continue to reap rewards for investors over time. The company is expanding its store footprint internationally. The Procter & Gamble Company (NYSE:PG) is projecting the middle class to grow by 1.4 billion people, and of that 98% will come from emerging markets. Wal-Mart Stores, Inc. (NYSE:WMT)’s international segment isn’t the most profitable, but given enough time this will be the company’s segment that will log the upside surprise.

Analysts on a consensus basis anticipate the company to grow earnings by 9.3% on average over the next five years. Wal-Mart Stores, Inc. (NYSE:WMT) trades at a 14.8 earnings multiple and generates a 2.5% dividend yield. The stock trades at a reasonable valuation, because of the historical consistency in the company’s earnings performance.

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