An analysis of Walgreen Co. (WAG) latest financial statements reveals that the company’s earnings are derived from sustainable sources, resulting in a score of 91 out of 100 on StarMine’s Earnings Quality score, which relatively ranks Walgreen Co against all companies in the region.
Some highlights from Q2 that we found most interesting:
- Return on net operating assets (T4Q) increased during the year (from 24.8% to 26.5%)
- Return on net operating assets (T4Q) was significantly above the industry median (26.5% vs. 16.3%)
- Net profit margin (1Q) increased during the year (from 5.8% to 7.4%)
- Free cash flow greatly exceeded net income in the quarter ($1.0B vs. $603M)
In the accompanying chart, green indicates when free cash flow (FCF) exceeds net income. Note that free cash flow exceeded net income during most periods over the last 2-1/2 years. This marks a significant improvement compared to 2007-2008. StarMine research finds that earnings backed by strong cash flows tend to be more sustainable than non-cash earnings.
Turning to operating efficiency, let’s look at the company’s operating profit margin. As you’ll see in this chart, WAG’s operating profit margin has exceeded the industry median by a significant amount over the past five years, increasing slightly to 5.5% in the most recent quarter compared to 5.4% a year ago.
While Walgreen Co’s earnings appear to be quite sustainable, it’s important to add that the company is presently engaged in a dispute with Express Scripts (ESRX) that may pose a stock price risk in contrast to the positive characteristics we note here.
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