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Without Walgreen Company (WAG) You Are Missing Health Care’s Transformation

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The transformation of American health care – more preventive care, more customers with insurance – remains controversial. But it’s ongoing.

And the best place to see it is in the accelerating numbers turned in by the biggest drug chains, Walgreen Company (NYSE:WAG) and CVS Caremark Corporation (NYSE:CVS).

Walgreen Company (NYSE:WAG)

Both chains have opened mini-clinics in some of their stores, where nurse practitioners and physicians assistants perform many functions general practitioners have in years past. These clinics have only just begun to impact results.

And if you believe in the clinic story, you’re better off with Walgreen Company (NYSE:WAG).

Walgreens: A Total Transformation

Walgreens wasn’t first into the clinic business model, but it has moved very aggressively.

By signing deals with major health insurers to cover Medicare patients, and by getting into both the diagnosis and ongoing care of chronic conditions like diabetes, Walgreen Company (NYSE:WAG) has shown leadership in expanding use of the clinics, which were originally built to handle simple functions like closing cuts and treating fevers.

The best news for shareholders is that these clinics are proving even more popular with high earners than with the middle class they were first created to serve.  A recent Kalorama survey, for instance, found 59% of clinic users earned over the median family income of $50,000. “What you’ve got is a person with money” visiting clinics, the company concluded.

Walgreen Company (NYSE:WAG) is trying to increase how much money they get from these people by redesigning its stores into one-stop lifestyle centers, with food, wine, coffee and wellness services in addition to medicines and medical care.

The result has been an accelerating top line. In the last three months the company has reported same-store sales gains of 2.3%, 3.8% and 4.3%. The company’s most recent fiscal quarter ended in May, and it’s due to report earnings June 25. The consensus earnings estimate if 95 cents per share, with some thinking it could go as high as $1.05.

Shares peaked last month at almost $51/share, and are now hovering near $49. Technicians show substantial bearish sentiment on the stock, so it should remain under pressure going into earnings.

If the company can hit its earnings estimates, however, and sustain that momentum through the year, the forward PE of the shares comes out as closer to 12 than their current level of nearly 22. I happen to buy the transformation story, which is why I’d buy Walgreen Company (NYSE:WAG).

Why CVS Can’t Follow

CVS Caremark Corporation (NYSE:CVS) was first to market with its Minute Clinics and has made substantial gains in states like Massachusetts, near its base in Rhode Island, where health reform is already well-along. But it hasn’t been nearly as aggressive as Walgreen Company (NYSE:WAG) in transforming its stores, or enhancing the value of those clinics.

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