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.

IN PICTURES:
How To Make Your First $1 Million

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.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!