Drug stores have a tremendous opportunity to profit in the long run. After all, the aging American population is plagued with health problems and drug companies are adept at marketing a cure for each and every one. In addition, drug stores offer food, makeup, newspapers, tobacco products and a wealth of other items at a good price, which should enable them to compete, at least to a certain degree, with more traditional retailers. Today we'll take a look at Walgreen (NYSE:WAG), which generated a great deal of ink earlier in the week on news that it will purchase drug store chain Duane Reade.

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Walgreen's Tasty Rx
As a standalone company, Walgreen is a major force in the drugstore business and has the potential to grow markedly in the years to come. It has favorable demographics, well-stocked stores and a large footprint across the country. Duane Reade, is much smaller, but it has the potential to add value and to contribute to Walgreen's bottom line.

Duane Reade is a drugstore chain that reportedly did under $2 billion in sales in 2009, which is small by Walgreen standards (Walgreen is expected to do more than $60 billion in total sales this year). However, it has a major focus in the New York area, which is an attractive market with millions of shoppers.

Based on personal experience, a typical Duane Reade store is not as aesthetically attractive as a typical Walgreen store. My hope is that Walgreen will eventually do something to spruce stores up and pull more foot traffic away from CVS (NYSE:CVS) and Rite Aid (NYSE:RAD), which are also prominent in the Big Apple. The New York economy is hurting right now due to large job losses in the financial services industry, but as the economy improves, the new and improved Walgreen concept stands to benefit.

From an investment standpoint, Walgreen presently trades under 15 times this year's estimate, which is attractive given its standing in the industry and growth prospects. It is also coming off two quarters of better-than-expected results. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

Other Ways to Play the Demand for Drugs
Target (NYSE:TGT) and Wal-Mart (NYSE:WMT) fill prescriptions and carry a wealth of other goods typically associated with drugstore chains. Moreover, the price points at which they sell many of their wares are often quite attractive. Incidentally, both stores should also experience respectable foot traffic as consumers continue to pinch their pennies.

From an investment standpoint, Target trades at under 14 times the $3.64 estimate for the upcoming year, and it is expected to grow more than 14% in the next five years. Stay tuned for the company's Q4 numbers on February 23.

Wal-Mart trades at around 13.4 times the $3.97 per share forward estimate, which is attractive given that the behemoth is expected to grow more than 11% per annum in the next five years.

Bottom Line

Drugstore chains have the potential to generate accelerated rates of growth in the years to come and among my favorites right now is Walgreen, which is even more attractive given the recent Duane Reade announcement. The fact that it trades at a relatively low multiple of expected earnings and has such a strong industry standing is exciting too.

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