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Walgreen Company (WAG), Cardinal Health Inc (CAH), AmerisourceBergen Corp. (ABC): A 6% Drop in the Largest National Drugstore Is a Buying Opportunity

Walgreen Company (NYSE:WAG) has recently experienced a nearly 6% drop to around $45.20 per share, losing nearly $2.7 billion in market capitalization within just one trading day. The daily drop was caused by Walgreen Company (NYSE:WAG)’s recent third quarter earnings results, which missed analysts’ estimates.

Should long-term investors consider this drop a buying opportunity? Let’s find out.

Third quarter earnings results grew but missed estimates

Walgreen Company (NYSE:WAG)

Walgreen Company (NYSE:WAG)’s third quarter results are not declining or staying flat, the company actually managed to grow both its top line and bottom line. Net sales experienced a 3.2% growth; from $17.75 billion last year to more than $18.3 billion this year while the net income rose by 16.2% to $624 million. The diluted Earnings Per Share (EPS) came in at $0.65, 4.8% higher than last year EPS. These Include acquisition and Last In First Out (LIFO) accounting  costs for Alliance Boots. Its adjusted EPS was much higher at $0.85. However, those results were lower than analysts’ expectations of $18.43 billion in revenue and $0.91 EPS.

Greg Wasson, the company’s President and CEO felt excited about the company’s year-over-year gain in the retail pharmacy market share, from 18.4% to 19.2%. He was also bullish about the 18.1% growth in adjusted EPS, thanks to the company’s cost control and the first year synergies with Alliance Boots of $125-$150 million and the earnings contribution from Alliance Boots.

10-year agreement and vertical integration with AmerisourceBergen Corp. (NYSE:ABC)

What might make investors bullish about the largest national drugstore is its recent 10-year agreement with AmerisourceBergen Corp. (NYSE:ABC) and the option to expand the business vertically with AmerisourceBergen Corp. (NYSE:ABC)’s stake. Walgreen Company (NYSE:WAG) currently distributed more than 80% of its own drugs, however, this agreement would let Walgreen utilize AmerisourceBergen’s network for daily drug distribution. Moreover, Walgreen Company (NYSE:WAG) and Alliance Boots had the right to acquire up to 7% stake in AmerisourceBergen in the open market and warrants are exercisable for an additional 16% stake. With this vertical integration, all of these three businesses definitely have more bargaining power in the pharmaceutical sector and operate more efficiently.

Walgreen Company (NYSE:WAG)’s agreement with AmerisourceBergen Corp. (NYSE:ABC) represented a big customer loss for Cardinal Health Inc (NYSE:CAH) as Walgreen used to contribute more than $22.5 billion to its revenue, accounting for 21% of Cardinal Health Inc (NYSE:CAH)’s total revenue. While Cardinal Health could renew its contract with its biggest customer, CVS Caremark Corporation (NYSE:CVS), it lets AmerisourceBergen take away Walgreen, its second largest customer.