For Immediate Release
Chicago, IL – March 7, 2012 – Zacks.com announces the list of
stocks featured in the Analyst Blog. Every day the Zacks Equity
Research analysts discuss the latest news and events impacting
stocks and the financial markets. Stocks recently featured in the
blog include Express
Scripts ( ESRX),
Walgreen ( WAG), Starwood Hotels
& Resorts Worldwide Inc. ( HOT), Marriott
International Inc. ( MAR) and
Wyndham Worldwide Corporation ( WYN).
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Here are highlights from Tuesday’s Analyst
Blog:
ESRX Hurts Walgreens Comps
The termination of the Express
Scripts ( ESRX) contract continues to
affect Walgreen ( WAG) sales.
Comparing the first 28 days in February 2012 with February 2011,
the company recorded a modest 1.5% year-over-year growth in sales
to $5.86 billion for the month of February 2012. Total front-end
sales increased 6.9% with a 2.0% rise in comparable store front-end
sales.
Prescriptions filled at comparable stores decreased 9.5% in
February this year. Lower incidence of flu (down by 1.2 percentage
points) and the negative impact of the contract termination with
Express Scripts (10.7 percentage points) were primarily responsible
for the lower prescriptions filled in comparable stores. In
February 2011, prescriptions processed by Express Scripts comprised
12.6% of Walgreen prescriptions.
Pharmacy sales, accounting for 61.6% of total sales, in
February, decreased 1.4% with an 8.6% decline in comparable
pharmacy sales. Comparable pharmacy sales witnessed a negative
impact owing to the introduction of generics in the last 12 months
(2.2), lower incidence of cough, cold and flu (2.4) and the
Express Scripts contract loss (10.6 percentage points). The lower
incidence of cough, cold and flu led to a decline in the number of
flu shots administered to 5.5 million for the season-till-date
compared to 6.3 million in the previous year. Sales in comparable
stores decreased by 4.6%.
In February, Walgreen opened 10 stores including 1 relocation,
and 1 acquired.
As per this preliminary announcement, Walgreen’s total sales for
the second quarter of fiscal 2012 were $18.63 billion, up 0.7% year
over year. Fiscal 2012 year-to-date sales for the first six months
were $36.79 billion, up 2.6% from the comparable period last year.
Calendar year-to-date sales were $11.64 billion, down 0.6% from
$11.71 billion in 2011.
At February 29, Walgreens operated 8,290 locations in all 50
states, the District of Columbia, Puerto Rico and Guam. With the
intention of retaining some of Express Scripts’ clients, Walgreen
recently came up with its comprehensive Patient Transition Plan,
which will enable the smooth transition of existing members of the
Express Scripts pharmacy network to another community pharmacy.
Under this plan, Walgreen is providing several discounts to the
members of Walgreen Prescriptions Savings Club, which facilitates
savings on over 8,000 brand names and all generic drugs.
Meanwhile, Walgreen is expanding its business with other payers
and customers and implementing cost-control initiatives. The
company is reassured by the fact that more than 100 of Express
Scripts clients, encompassing health plans and employers, would
continue with Walgreen pharmacies in 2012. The company aims to
retain 10 million prescriptions annually and maintain 97-99% of the
2011 prescription volumes at fiscal 2012 end.
Our Take
Despite its best efforts to counter the loss of the Express
Scripts contract, which accounted for 7.3% of total sales in fiscal
2011, Walgreen’s financials will, nevertheless, be affected by the
loss of the contract. Although the company is expecting to retain
75% of its business, we await further clarity regarding this.
On a long-term horizon, we are nonetheless optimistic about
Walgreen. The introduction of new generics should help improve the
company’s gross margins in the second half of fiscal 2012.
Moreover, a strong cash balance enables the company to reward its
shareholders. During the last reported quarter, the company
enhanced shareholders’ value through dividend payments and share
repurchases amounting to $803 million ($601 million in share
repurchases and $202 million in dividends). In the last eight
years, the company’s dividend has grown at a compound annual growth
rate (“CAGR”) of nearly 22%.
Currently, Walgreen retains a Zacks #4 Rank (short-term Sell
rating). However we have ‘Neutral’ recommendation on the stock over
the long term.
Starwood Downgraded to Neutral
We have recently downgraded our rating on the shares
of Starwood Hotels & Resorts Worldwide
Inc. ( HOT) to Neutral from Outperform due to a
slowdown in 2012 RevPAR growth target in North America, weak EBITDA
projection as well as weakness in certain international
markets.
We were impressed with Starwood’s outperformance in the recently
concluded fourth quarter of 2011. The strength of the namesake
brand allows the company to charge a premium for its hotel rooms.
Moreover, the company is in a steady expansion mode. Starwood
has over half of its hotel properties outside the U.S., an
international exposure that not many of its peers can boast of.
Starwood will open 80 new hotels in 2012, with 75% of them being
outside North America, primarily in the faster growing Asia
(60.0%). The company’s balance sheet also remains in good
shape.
However, although we believe that Starwood is well positioned
for the long term, we expect the operating environment to weaken in
the near term before improving. In the developed markets,
unemployment remains extremely high and the pressure of public and
private debt is mounting, leading to a slower pace of recovery.
Management expects lodging recovery in North America to be slower
in 2012 than 2011.
Exchange rate shifts will negatively impact Starwood’s hotel
business in 2012. EBITDA will be hurt by approximately $7 million
net of benefits from Euro hedge. Additionally, there are several
Starwood properties awaiting renovations in 2012. Hence, 2012
renovations and the hotels sold in 2011 will adversely impact the
company’s total owned EBITDA by $10 million.
To add to the worry, there is the Eurozone debt crisis. RevPAR
was flat in Europe in the fourth quarter of 2011 due to the
austerity measures and fragile economic conditions in Europe.
Management commented that softness in demand will likely loom in
future, despite the adoption of crucial measures in resolving the
crisis. Deceleration in European RevPAR is a cause of concern given
Starwood’s considerable exposure to that region.
The other geographies are also not in a very good shape. Unrest
in Middle East and Africa as well as the Korean Peninsula remains
another area of apprehension. In Japan, although occupancies
recovered well from early 2011, revival of average daily rate was
still down compared to the pre-earthquake level. In fact, China,
Starwood’s one of the strongest hubs, targets economic growth of
7.5% in 2012. It is the slowest rate since 2004.
Moreover, we believe all the positive attributes in the stock
are reflected at the current level. Hence, in light of the current
state of industry fundamentals, we recommend investors to remain on
the sidelines.
Starwood, which competes with the likes of Marriott
International Inc. (
MAR) and Wyndham Worldwide
Corporation ( WYN), currently retains the Zacks #3
Rank that translates into a short-term Hold rating.
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EXPRESS SCRIPTS (ESRX): Free Stock Analysis Report
STARWOOD HOTELS (HOT): Free Stock Analysis Report
MARRIOTT INTL-A (MAR): Free Stock Analysis Report
WALGREEN CO (WAG): Free Stock Analysis Report
WYNDHAM WORLDWD (WYN): Free Stock Analysis Report
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