Walgreen Company (WAG), Express Scripts Holding Company (ESRX): The Pharmacy America Trusts Fights Back

Walgreen Company (NYSE:WAG) recently made mistakes that temporarily affected its stock in a negative way. Its greatest error was choosing to not participate in the Express Scripts Holding Company (NASDAQ:ESRX) program, which is a very popular program among Walgreen customers. This move caused Walgreen to lose millions of customers to competitors, such as CVS Caremark Corporation (NYSE:CVS), and other pharmacies like Wal-Mart Stores, Inc. (NYSE:WMT).

Luckily for investors, Walgreen Company (NYSE:WAG) decided to reverse this decision and began participating in the Express Scripts program again. The shares have started to recover and I believe that the outlook for Walgreen is positive.

Walgreen and the Express Scripts misstep

When Express Scripts Holding Company (NASDAQ:ESRX) combined with Medco, the new company began handling more than 400 million customer prescriptions. When Walgreen decided not to participate in the Express Scripts program because it was not getting what it wanted from Express Scripts, it lost nearly all the customers that used this program, resulting in a huge loss. The company has reluctantly admitted that most of its former customers who use Express Scripts are now at other pharmacies. It will now have to try to win those customers back.

Walgreen Company (WAG): Will a New Loyalty Program Help This Drugstore?CVS Caremark Corporation (NYSE:CVS) and Wal-Mart Stores, Inc. (NYSE:WMT) benefited greatly from the decision by Walgreen Company (NYSE:WAG) to not participate in the Express Scripts Holding Company (NASDAQ:ESRX) program. Sales were up significantly for both companies, which gained new customers that left Walgreen. It will be difficult for Walgreen to get these customers back. It is always more difficult to win new customers than it is to retain existing customers. It will be an expensive endeavor, as Walgreen will be spending millions of dollars on advertising to get the customer count back to the former level. You can bet that both CVS and Wal-Mart will be working hard to retain new customers, making it more difficult for Walgreen.

Some investors have tried to insist that Walgreen Company (NYSE:WAG) was correct in the Express Scripts decision, but the sales numbers don’t lie. Deciding to abandon Express Scripts Holding Company (NASDAQ:ESRX) was clearly a bad decision; there is little point in trying to defend it.

But the good news is that Walgreen did decide to reverse its decision. Sometimes, companies are not even aware that their policy decisions could result in significant damage until its too late. The only thing Walgreen could have done better would have been to reverse its decision sooner. To its credit, once it became clear that it had made the wrong decision, Walgreen reversed course.

Back on track

Though winning back customers will be difficult, there is also positive news that seems to signal that Walgreen Company (NYSE:WAG) is recovering. Now that it has started to participate in the Express Scripts program, it has gained new customers that use the service. It may be the case that some customers that were Express Scripts Holding Company (NASDAQ:ESRX) users have come back to Walgreen because it is actually the most convenient pharmacy for them. Walgreen may also be getting some new Express Scripts customers since joining with the network again. Either way, Walgreen has said that participating in the program has benefited sales figures.

Another bit of positive news is that repeat pharmacy business is up for Walgreen Company (NYSE:WAG). Though still negative by almost 3%, sales figures were worse in previous quarters, sometimes as much as 10% negative. This is an upward trend, so Walgreen may start seeing positive figures for repeat pharmacy business this year. Especially when you consider that Walgreen was able to attribute most of the negative same-store value to generic prescriptions.

The stock will also benefit from the $2 billion stock buyback plan in the next three years. Walgreen delayed this plan last year, causing trouble for short-term investors. Walgreen made a large stock purchase with Alliance Boots, so it did not repurchase much stock last year. Now Walgreen appears to be returning to the former method, which is great news for long-term investors.

Stock valuation

Walgreen Company (NYSE:WAG)’s stock has been increasing and there is reason to believe that the upward trend will continue. Many investors are concerned that they missed the boat on the stock gains, but I don’t believe that is the case. There is still headroom for the Walgreen stock to rise.

Walgreen offers a good yield, slightly over 2.20%, and its earnings are projected to increase approximately 14% this year, which is better than its major competitors. For example, compare this to CVS, which has a yield of a little over 1.5% and is expected to only have a small amount of growth this year. Investors may be attracted to the higher yield that Walgreen pays.

Wal-Mart also offers competition to Walgreen, paying a higher yield, which is slightly over 2.50%. On the other hand, Wal-Mart is projecting lower growth than Walgreen.

Express Scripts Holding Company (NASDAQ:ESRX) could be attractive to investors, but it is not likely to get much attention until it starts offering a dividend. Investors appear to be unsure if Express Scripts will be able to achieve its targeted growth this year. Express Scripts stock is selling about 13 times forward earnings, but its projected growth is over 15%. Investors don’t appear to be confident that Express Scripts can achieve that sort of growth this year.

The bottom line

Pharmacies such as CVS are always attractive to investors. Companies like Express Scripts Holding Company (NASDAQ:ESRX) also get attention from investors, but it appears that Walgreen is making sound decisions now. It is going back to more reliable, time-tested strategies, and this method has been paying off. The Express Scripts problem is in the past, and Walgreen stock is going up. If it continues to makes safe decisions, I feel that Walgreen will be able to win customers back and that sales will continue to improve. Thus, I think Walgreen Company (NYSE:WAG) stock will have a positive outlook in the future.

The article The Pharmacy America Trusts Fights Back originally appeared on Fool.com and is written by Nauman Aly.

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