Walgreen rates a `buy' after 30 years of profit growth

Taking Stock

Your Money

November 20, 2005|By ANDREW LECKEY

I've owned shares of Walgreen Co. in my individual retirement account for a number of years. Are they still a good investment?

- J.T., via the Internet

They remain a fine choice for your retirement account.

It is difficult to fault a company that has produced three decades of consecutive annual earnings growth. Many of its investors grew up as its customers and maintain high expectations for it.

Walgreen is a constantly expanding, brand-name innovator in an easily understood business that is increasingly dominated by large operators. It benefits from the growing prescription needs of a population growing older.

Shares of Walgreens (WAG) are up 20 percent this year, after increases of 5.5 percent last year and 25 percent in 2003.

The stock is not perfect, having declined 13 percent in 2002 and 19 percent in 2001. The company can never be complacent because it constantly is being tested by consumer attitudes, weather and lofty expectations.

Because prescription drugs account for 65 percent of sales, there are concerns about drug competition, the national pharmacist shortage, lower reimbursement rates and potentially unfavorable legislation.

Building on more than 5,000 stores in 45 states and Puerto Rico, Walgreen plans to open a record 475 stores in its fiscal year that began in September. It is converting eight Medic stores in Cleveland, and it recently bought Schraft's A Specialty Pharmacy LLC in New Jersey, which specializes in fertility medications.

Sales growth is impressive, and Walgreen leads the industry in 24-hour and drive-through stores. It has had 72 years of higher dividends, features a strong balance sheet with no debt and generates lots of cash.

The effects of Hurricane Katrina and the rising popularity of generic prescription drugs over more expensive brand-name drugs have put pressure on profit. Walgreen posted a double-digit sales increase in its most recent quarter, but profit of $329 million fell short of Wall Street estimates, and the stock suffered.

Recommendations on Walgreen's stock reflect the relative confidence of various Wall Street analysts about consumer spending. The current consensus opinion is a "buy," according to Thomson Financial, consisting of seven "strong buys," four "buys" and 11 "holds."

Walgreen also sells non-prescription drugs and acquired the rights to the Theragran-M name. Besides health and beauty items, food and general merchandise, it has a profitable in-store digital photography unit. It provides mail-order prescriptions and pharmacy benefits management, recently joining WellPoint Inc. to market a prescription drug plan to Medicare beneficiaries.

Earnings are expected to increase 16 percent this year, versus 9 percent predicted for the drugstore industry.

Next year's expected 15 percent increase compares with 13 percent projected industrywide. The forecast of a 16 percent five-year annualized growth rate compares with 12 percent for its peers.

I have owned AIM Leisure Fund for several years and was pleased with its performance until recently. What is your opinion of this fund?

- C.H., via the Internet

Though partly based on fun and games, this fund outperformed the Standard & Poor's 500 index for seven straight years before the recent bad run you've noted.

Concerns about consumer spending due to higher energy costs whacked many companies whose shares it owns. Hurricane damage, though not directly affecting all the companies, had a general dampening effect.

That doesn't mean you should sell.

The $785 million AIM Leisure Fund (FLISX) rose 3 percent over the past 12 months to rank in the lowest 5 percent of large growth funds. Its three-year annualized return of 12 percent puts it in the upper half of its peers.

"If you want a growth fund but don't want a lot of technology or health care stocks that are volatile, this fund can be a good substitute," said Laura Pavlenko Lutton, analyst with Morningstar Inc. in Chicago. "Since you already own the fund, I wouldn't let this year's troubles bother you."

Closed to new investors, the fund has an annual expense ratio of 1.32 percent.

Its broad definition of leisure includes casinos, media, consumer services and consumer goods. Top stock holdings recently were Harrah's Entertainment, Omnicom Group, AIM Treasurers Series Trust, News Corp. Class A, Groupe Bruxelles Lambert and Starwood Hotels & Resorts Worldwide.

Run by experienced stock-picker Mark Greenberg since 1996, AIM Leisure Fund can fulfill the role of supporting player in an individual's portfolio.

Greenberg seeks strong earnings-growth rates at reasonable prices and expects a stock's price to double within two years of purchase. Volatility and turnover are low.

In the fall of 2004, AIM Investments reached a $375 million settlement with regulators over market-timing activity primarily tied to the now-defunct Invesco Fund Group. AIM has since worked to improve internal safeguards and shareholder communication.

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