[جمشيد]

Walgreen (WAG): The premier drugstore chain took the market by surprise reporting a 30% rise in 1Q profits - the highest in sixteen quarters. Higher gross margins, digital photo processing and front-end sales, as well as a lower tax rate drove profits. Earnings for the quarter, excluding a pre-tax gain from litigation settlements, came in a $323.2 mln, or $0.31 per share. Walgreen, which historically reports in-line to a penny ahead of expectations, handily beat the consensus estimate of $0.29 per share sending shares up in pre-market trading.

Same-store sales rose 9.4% during the quarter with front-end sales gaining 6.1%. Pharmacy sales, which make up 65% of profits, rose 11.3% with total sales up 14.4%. WAG has an impressive balance sheet allowing it to continue to expand and drive organic growth. It opened 111 new stores in Q1 targeting the addition of 450 in FY05 and more than 7,000 by 2010.

This is a volume-based business. As such, the key to success is a strong brand name and a lead market share position. Walgreen has both. The company has also been able to hold profitability steady over the years with net margins around 5.8%. During Q1, WAG generated higher gross profit margins through the successful launch of its in-store digital photo finishing services and stronger generic drug sales. The conversion from analog to digital labs in its stores gives Walgreens a competitive edge, but it did not come cheap. Nevertheless, digital photo services are already generating positive returns as consumers can now print their photos with ease and for less than the cost of in-home printers.

Despite its strong performance this quarter, Walgreen, as well as others in the industry, are facing numerous challenges that could constrict growth over the longer term. These include the steady decline in prescription drug sales over the past few years, lower reimbursement rates, pressure from mail order sales, and the disinflation of drug prices. Competition is also quite tight within the retailing segment, particularly from CVS (CVS), which has acquired the Eckerd stores expanding its foothold into some of WAG's territories.

Shares in Walgreens are trading at 26.9x current and 23.4x forward earnings. This is a 50% P/E premium to the S&P 500. Despite its 15% growth rate next year this type of premium earnings multiple has caused some investor caution leading to its underperformance versus its peers. However, this result clearly might be the spark the stock needed in the short term, but performance over the longer term will be driven by its