Walgreen: Is a Bottom in Place?

With the dispute resolved, store revenue should carry the day, and look for Walgreen's revenue to rise about 6% to 8% in 2010, boosted by the addition of about 300 net new store openings. Front-store traffic trends in their more than 7,000-store chain are improving, and back-store (pharmacy) margins should benefit from increased sales of higher-margin generic drugs.

Further, the company's beefed-up presence in the lucrative Metro-New York City market as a result of the Duane Reade acquisition adds to the positive mix.

The First Call FY2010/FY2011 EPS estimates for WAG are $2.22 to $2.64. Each EPS estimate looks about 5% low, according to my analysis.

Technically, as noted, Walgreen's stock has formed a bear hug, sliding from $40 to about $29, and were it not for WAG's drug store chain status, the stock would have been kicked, as the technicals conflict with the company's fundamentals. As of now, the calculation is that WAG will hold support at/near $29.

However, the sell/stop loss has been raised to $25 from $17 to reduce downside risk, in the event the stock chart continues to deteriorate.

2010 Outlook: I view Walgreen as a long-term play, but if investors are looking to sell WAG within the year, it's probably best to take your profits after it rises to $37 to $39, if it fails to rise above $40.

Stock Analysis: I consider Walgreen Co. to be a moderate-risk stock. If an investor has already purchased the company's shares, I'd hold them. If not, I'd consider buying a 25% position in WAG now, then buy another 25% in one month if U.S. economic conditions don't worsen substantially. Under any circumstance, I wouldn't buy more than 50% of my WAG position before August 2010 and I'd put a sell/stop loss at $25.

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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.