Options Trade – Walgreen Company (NYSE:WAG) Calls 
Monday, June 23, 2014

**OPTIONS TRADE: Buy the WAG Oct 2014 80.000 call (WAG141018C00080000) at or under $2.60, good for the day. Place a protective stop limit at $1.00 and a pre-determined sell at $5.00.

by Ian Harvey

June 23, 2014

Introduction

The largest drugstore chain in the U.S, Walgreen Company (NYSE: WAG), is scheduled to report results for its fiscal third quarter before the market opens on June 24. Headed into the company's quarterly report, the consensus estimate is for earnings of $0.94 per share. WAG has shown a lot of strength in 2014, with the stock appreciating 33.7% year-to-date.

The company’s top line growth has re-accelerated since it resolved its dispute with pharmacy benefits management company Express Scripts in September 2012. Despite a soft macro environment, Walgreen started its fiscal 2014 on a strong note and has retained its growth momentum so far this year. Its calendar 2014 year-to-date sales for the first five months stand at $31.9 billion, a 5.5% increase over the same period last year.

Beating the negative impact of severe weather conditions, Walgreen reported 5.1% year-over-year growth in its Q2 2014 earnings. Walgreen’s strong performance last quarter can be attributed to its strong fundamentals, the return of Express Scripts customers and the company’s ongoing progress in winning new Medicare Part D customers. The company retained it growth momentum in Q3 2014, as is evident from strong sales for the quarter (reported on June 5). Total sales for Q3 2014 were $19.47 billion, 6.4% higher compared to Q3 2013.

Walgreen believes that focus on its three strategic growth drivers — i.e., creating a Well Experience, advancing the role of the community pharmacy and establishing an efficient global platform — help it become a leading global pharmacy. As of May 2014, it operated 8,683 locations across 50 states in the U.S., the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands. A large footprint places the company in a strong position to benefit, both from an aging U.S. population and the Affordable Care Act’s expansion of insurance to millions of Americans.

Analysts have forecast earnings growth of 15% in 2015. The stock has a relatively high valuation, with a P/E ratio of 26.8, so there is some downside risk if the quarterly report shows a large amount of weakness, but I do not believe we will see much selling in reaction to a miss, but should see a lot of price target increases if the company does outpace estimates which will send the stock higher.

Technical Review

WAG was recently trading at $76.08, just $0.09 below its 12-month high and $32.77 above its 12-month low. Technical indicators for WAG are bullish and the stock is in a strong upward trend. The stock has support above $72.30 and is trading above recent resistance.

Earnings

Walgreen Company (NYSE:WAG) last released its earnings data on Tuesday, March 25th. The company reported $0.91 earnings per share (EPS) for the quarter, missing the consensus estimate of $0.93 by $0.02. The company had revenue of $19.60 billion for the quarter, compared to the consensus estimate of $19.61 billion.

During the same quarter in the previous year, the company posted $0.96 earnings per share. The company’s revenue for the quarter was up 5.1% on a year-over-year basis. Analysts expect that Walgreen Company will post $3.45 EPS for the current fiscal year.

Analysts Opinions

In a report published Friday, Morgan Stanley analyst Ricky R. Goldwasser reiterated an Overweight rating and $85.00 price target on Walgreen.

In the report, Morgan Stanley noted….

“We expect management to present a constructive message as it continues to work towards exercising step 2 of the AB deal and establishing the foundation for a ‘new Walgreens'. On the call we hosted with CEO & CFO last month management highlighted it is working with AB to form joined teams, analyzing structure of potential inversion, and articulated greater flexibility towards debt loads. We expect a similar message on earnings call to resonate well with investors.”

Also, the company has been the subject of a number of research reports:-

• Barclays upgraded shares of Walgreen from an equal weight rating to an overweight rating in a research report sent to investors on Wednesday morning. The firm currently has $92.00 price target on the stock, up from their previous price target of $56.00.

• Analysts at Mizuho raised their price target on shares of Walgreen Company from $78.00 to $83.00 in a research note on Monday, June 9th. They now have a buy rating on the stock.

• Separately, analysts at Morgan Stanley reiterated an overweight rating on shares of Walgreen Company in a research note on Monday, June 2nd. They now have a $75.00 price target on the stock.

• Finally, analysts at Cowen and Company downgraded shares of Walgreen Company from an outperform rating to a market perform rating in a research note on Wednesday, May 14th.

Conclusion

Even with the frequent earnings misses, Walgreen has maintained its strong upward trend, and it is believed that it will remain strong regardless of its earnings report (assuming results are not terribly off the mark).

There are two primary reasons why analysts continue to push the stock higher despite recent earnings misses. The Affordable Care Act is going to lead to a higher number of insured Americans, which in turn leads to higher doctor visits and prescriptions written. Another reason to be optimistic is the aging U.S. population which will also lead to a higher number of prescriptions being written.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE: Buy the WAG Oct 2014 80.000 call (WAG141018C00080000) at or under $2.60, good for the day. Place a protective stop limit at $1.00 and a pre-determined sell at $5.00.



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