Will Walgreen Continue Higher Post-Earnings?

With shares of Walgreen (NYSE:WAG) trading around $56, is WAG an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Walgreen operates a drugstore chain in the United States. The company provides its customers with access to consumer goods and services, pharmacy, and health and wellness services in communities across the U.S. Walgreen sells prescription and non-prescription drugs, as well as general merchandise that includes household items, convenience and fresh foods, photo finishing, and candy. General convenience and wellness merchandise is important to consumers across the nation, and Walgreen is a go-to shop for quick and efficient general merchandise and health and wellness experience for consumers that should continue well into the future.

On Tuesday morning, Walgreen posted earnings that beat Wall Street’s expectations, but came up short on the revenue expectation. “We had a solid quarter across our entire business. We saw improvement in our daily living business resulting from the investments we made and enhanced execution. We also saw continued strength in our pharmacy business as we increased our retail pharmacy market share for the fiscal year to 19.1 percent, and we continued to make great progress on controlling selling, general and administrative costs,” said Walgreens President and CEO Greg Wasson.

T = Technicals on the Stock Chart Are Strong

Walgreen stock has surged to the upside in recent quarters. The stock is currently trading near all-time high prices and looks poised to continue higher. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Walgreen is trading above its rising key averages, which signal neutral to bullish price action in the near-term.

WAG

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Walgreen options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Walgreen Options

25.24%

16%

15%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

October Options

Flat

Average

November Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Walgreen’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Walgreen look like and more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

15.87%

18.06%

1.28%

-31.75%

Revenue Growth (Y-O-Y)

5.08%

3.16%

-0.02%

-4.63%

Earnings Reaction

5.22%*

-5.89%

5.44%

-3.30%

Walgreen has seen increasing earnings and mixed revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Walgreen’s recent earnings announcements.

* As of this writing

P = Excellent Relative Performance Versus Peers and Sector

How has Walgreen stock done relative to its peers, CVS Caremark (NYSE:CVS), Rite Aid (NYSE:RAD), Wal-Mart (NYSE:WMT), and sector?

Walgreen

CVS Caremark

Rite Aid

Wal-Mart

Sector

Year-to-Date Return

50.39%

19.26%

260.70%

8.00%

18.33%

Walgreen has been a relative performance leader, year-to-date.

Conclusion

Walgreen is a pharmacy and general merchandise retailer that provides health, wellness, and other general products to consumers across the nation. A recent earnings release has investors excited about the company. The stock is now trading near all time high prices and looks ready to move higher. Over the last four quarters, earnings have been rising while revenues have been mixed which has produced conflicting feelings among investors about recent earnings announcements. Relative to its peers and sector, Walgreen has been a year-to-date performance leader. Look for Walgreen to continue to OUTPERFORM.

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