Motley Fool: Walgreen’s surprising results make it best of breed
Talk about your pleasant surprises. Walgreen (NYSE: WAG) recently beat Wall Street earnings estimates, with sales up a mite over year-ago levels.
The bright spot was the increase in prescription drug sales (up 6.5 percent) and volume (up 3.3 percent), well above the industry trend. Brick-and-mortar drugstores have been steadily losing this business to online pharmacies and big-box discount retailers. Prescription sales account for about two-thirds of the company’s revenue.
During the recent economic downturn, U.S. consumers have been saving money by visiting doctors less, resulting in fewer prescriptions. So Walgreen’s prescription upswing is a positive sign for the economy as well. While Walgreen’s pharmacy business is being squeezed by tightened reimbursement rates, these were offset somewhat by increased generic prescriptions.
Walgreen is also profiting from its store redesign program, having converted more than 1,500 company stores, while also opening nearly 300 more new-format stores this year. The redesigned stores have been outperforming nonconverted stores by 3.7 percent over the past 26 weeks.
While posting a strong quarter in a difficult business environment is great, cash-strapped consumers remain a headwind.
Still, Walgreen is the best of a struggling breed, and as its redesign and its large Duane Reade acquisition progress, it’s in a promising position.
Ask the Fool
Q: How can a stock’s price change a lot overnight, when the market is closed? – N.G., Abilene, Texas
A: It’s not the trading that makes a stock price rise or fall; it’s the perceived value of the company. Imagine that shares of Farm Dogs Inc. (ticker: BINGO) are at $25 when the market closes one day. That evening, the company reports surprisingly steep growth in sales and earnings.
When trading resumes the next morning, the stock price isn’t likely to open at $25 and then creep up slowly. Instead, it will just begin trading at a significantly higher level. That’s because many investors are now assigning a higher value to the company, and the limited existing shares have risen in value to meet the higher demand.
Buyers are simply willing to pay more. The opposite happens when a stock is viewed less favorably.
Q: When a company buys another, does the acquired company’s stock price go up or down? – H.B., Bloomington, Ind.
A: It depends on the deal and the purchase price. If the acquiree’s current market value is around $1 billion, and it’s bought for $1.5 billion, you can expect the stock price to jump on the news. When a company is very desirable, perhaps due to its growth prospects, a buyer may have to outbid other interested companies. But if a firm is struggling, it might get scooped up for a song.
Meanwhile, if investors think that the acquiring company has struck a good deal, its own price might also rise. But if they think that the company overpaid or won’t see a good return on its investment, the price can fall.
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