Can Walgreen Stock Return to New Highs In 2015?

After topping $76 a share earlier this year, Walgreen's stock price has fallen below $60 a share. Notably, all of these losses occurred after Walgreen announced that it would not relocate its headquarters to Switzerland following the acquisition of Alliance Boots, thus keeping its 35% corporate tax rate intact. However, this news isn't as bad as investors think. In fact, I think Alliance Boots will have a profound effect on Walgreen's stock.

Where does Walgreen go from here?
In fiscal 2014, Walgreen paid approximately $1.52 billion to the government as income tax. If the company had acquired Alliance Boots and relocated to Switzerland, it could have theoretically reduced its tax costs due to Switzerland's corporate tax rate being less than half of the U.S.' rate. While Walgreen elected to stay in the U.S., there is still great upside in the synergies between it and Alliance Boots, enough so to push shares to new highs.

First, Walgreen might have added to its bottom line by leaving the U.S., but what many investors have forgotten is that Walgreen's existing business may have faced turmoil had the company elected to invert itself. Walgreen CEO Greg Wasson elaborated on this topic by saying he was "mindful of the ongoing public reaction to a potential inversion" in regards to what swayed the company to stay in the U.S.


In essence, there was fear that consumers may not want to do business with a company that "bailed" on the U.S. to avoid paying taxes. Not to mention, there's the question of whether Walgreen could face government backlash, as Wasson pointed out, "(Walgreen receives) a major portion of its revenues derived from government-funded reimbursement programs."

That said, Walgreen doesn't need to be in Switzerland in order to find synergies from Alliance Boots. Walgreen noted during its fiscal fourth quarter report that synergies from Alliance Boots totaled $491 million during its 2014 period, and could top $650 million next year. In other words, Walgreen is still saving a lot of money without the inversion, nearly the same as it would by moving to Switzerland.

Can Walgreen get back to $76, or higher?
All things considered, Walgreen is a company whose comparable-store sales increased 5.4% during its last quarter, trumping the likes of Wal-Mart, Target, and even top retailers like Costco. Hence, the company is performing well, and Alliance Boots is only going to make Walgreen larger, and make its stock appear foolishly cheap.

After Walgreen completes its acquisition of Alliance Boots early next year, buying the remaining 55% stake it does not currently own, Walgreen will gain a company that grew 4.3% and generated $32 billion in revenue during its fiscal 2014. Also, Walgreen will gain a company whose net profit increased more than 30% to $1.3 billion in the same period.

While the stock is currently trading under $60 a share as of September 30, the pure size of the soon-to-be combined company makes Walgreen's shares significantly undervalued in my opinion. In fact, even at $76, its previous high, Walgreen would still be attractive.

At $76 a share Walgreen would trade with a market capitalization of about $73 billion. Based on the combination of Walgreen and Alliance Boots' fiscal 2013, the combined company would trade at just 0.66 times sales and 16 times 12-month earnings. In comparison, competitor CVS trades at 0.70 times sales and 19.5 times earnings. Therefore, even at $76, Walgreen shares would potentially present a value opportunity, once the acquisition of Alliance Boots is complete.

Foolish Thoughts
All things considered, the news of Walgreen staying in the U.S. may have seemed disappointing, but long-term, it was likely a wise decision. This is a company that's still going to save big money in synergies, will have expansion potential in Europe, and is guiding for mid-single digit revenue growth through next year. As a result, Walgreen looks like a prime investment opportunity looking ahead, one that could return to new highs.

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The article Can Walgreen Stock Return to New Highs In 2015? originally appeared on Fool.com.

Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale and CVS Health. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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