Although I realize that some consumers aren't spending big bucks, even on small ticket items (such as gum, cold meds and hair spray), and that some are even skimping on prescription drugs, I don't think that the drugstore arena should be overlooked altogether. For a long-term perspective, my favorite is Walgreen (NYSE:WAG).

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The Case For Drugstores
From a longer-term point of view, drugstores in general could do extremely well. The primary reasons for this sector's long-term success lie in the aging domestic population and the large number of overweight people, which can lead to other health problems. However, I still think that the road ahead could be a bumpy one for Walgreen.

The Pros and the Cons
In the month of June, the company's comparable store sales were up 3.4%. Now that's not huge, but it is positive, and in this environment that is a plus. Walgreen also compares favorably to another big name, Rite Aid (NYSE:RAD). In fact, Rite Aid, saw its same-store sales numbers decline by 0.6% in June. (Same store sales is one of the metrics used to analyze retail socks, learn more in our article Analyzing Retail Stocks.)

However, it's not all good news for Walgreen when it comes to the near term. For example, a quick look at the earnings estimate trend reveals that the company's estimate for this year has actually come down a nickel over the last 30 days from $2.05 to $2. That's hardly the company's death knell, but it shouldn't be overlooked. In comparison, the estimate for Rite Aid for the current year has gone from a loss of 42 cents to a loss of 46 cents over the last 30 days. And the average estimate for the current year for CVS (NYSE:CVS) has stayed level at $2.45 over the last 30 days. Meanwhile, the estimate for the current year for Wal-Mart (NYSE:WMT), which fills prescriptions and sells a lot of the same merchandise as the drugstores, is at $3.54 a share, where it was 30 days ago. Finally, the estimate for Target (NYSE:TGT) for the current year is at $2.83.

I think it's also important to mention that Walgreen trades at about 14.8 times this year's estimate, which isn't too outrageous given what I perceive to be its longer-term prospects. However, given the estimate trend and an extremely fickle consumer in the coming six months or so, the company is not as cheap as I'd like right now. Ideally, I'd like to hop aboard at around 12 times the current year estimate (a $2 profit), which would imply a price in the mid-$20 range.

Possible Changes in the Near-Term
If evidence emerges that our economy is indeed headed for that highly elusive V-shaped recovery, I might be more bullish on the stock. I'd also like to see insiders aggressively buying in the open market. While insider buying is no guarantee of future success, it would make me feel more comfortable with this as an entry point. (Insider transactions can reveal much about a stock, learn more in our article Keeping an Eye on the Activities of Insiders and Institutions.)

Bottom Line
Long-term I'm still a bull on the drugstores and Walgreen is at the top my favorites list. However, I do want to point out that the near-term could be quite bumpy and that it's possible there could end up being a better entry point down the road.



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Tickers in this Article: WAG, CVS, RAD, TGT, WMT

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