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. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  2. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  3. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  4. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  5. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  6. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  7. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  8. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  9. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  10. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>
COMPANIES IN THIS ARTICLE
Trading Center