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The Dancing Pie

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May 11, 2008 – Comments (13) | RELATED TICKERS: CVS , RAD , WAG

A couple of weeks ago my friend Leif asked me if I would review the Drug Store Industry to see if there was a company or two that he could add to his portfolio.

Let me say at the start, when it comes to investing, Leif isn’t exactly the sharpest knife in the drawer. In fact, when it comes to investing, he’s dumber than a stump. Were it not for his daughter Willow, I’m sure Leif would have lost all his money a long time ago.

So after arguing with him for a couple of weeks that he didn’t need to add a drug store stock to his portfolio, I gave in and told him I would take a look, but not until he paid me.

Several weeks later I ran into Leif at the bank and he asked me how things were going with the research he wanted. I reminded him that I wasn’t going to do anything until he paid me, unlike all of the times before this.

This led to a cussing match that the eavesdropping busybody, widow Mellon, found hysterical…which led to her dentures coming loose, which led to her almost swallowing them, which led to the paramedics being called, which led to the police being called, which led to more cussing, which led to the bank manager breaking the widow Mellon’s dentures when he stepped on them as he tried to break up the fisticuffs between me and Leif.

Thinking back on it, I guess it had to be sort of comical, two old geezers trying to go at it in the middle of the bank lobby. Now that’s something you don’t see every day.

Eventually the paramedics decided to take the widow Mellon to the hospital, just to make sure she was going to be okay, and Leif and I ended up in the back of Police Chief Olaf’s police car while Arvil Sturgeon, the Bank Manager, explained what had gone on.

About the time I started to wonder how much trouble Leif and I might be in, Leif looked at me and said he had a plan to get us off the hook. All I said was had he paid me like he said he would we wouldn’t be on a hook.

I knew what was coming before I said what I said, but being one those folks that just can’t resist, I said it anyway.

You guessed it, more cussing, more trying to get a good swing at each other, more injury inflicted on ourselves by ourselves than on each other, more and more and….

Our screaming and the attendant commotion led Police Chief Olaf to his car to see what was going on. As he walked up to my side of the car, Leif leaned forward and the next thing I know it was complete pandemonium.

When Leif leaned forward he was trying to turn on the siren, but instead he hit the gearshift lever, popping the idling police car into reverse. All of this happened just as Leif decided to implement his plan for getting us off the hook, which as it turned out was to make a run for it!

Hell, at his age Leif couldn’t run to the bathroom if he had loose bowels much less run from the police.

I once saw him try to run behind a tree in a desperate attempt to hide the fact from his daughter that he was still smoking cigars. Of course he never came close to reaching his hiding place before Willow caught him.

It seems that when Leif gets nervous his brain goes into ultra dumb mode, because aside from not being the sprinter of his dreams, Leif never thought to put out the cigar.

So when Willow caught him with the cigar in his hand as he tried to hide behind the tree, he looked her straight in the eye and told her the cigar wasn’t his…he found it.

He and I were on the outs for weeks and weeks after that incident. I mean I was there, I saw what happened. It isn’t like I was spreading a rumor all over town?

Things didn’t die down for Leif about the cigar tree incident till the town carpenter Stumpy Gurgle was caught sawing old lady Trimble in her backyard Gazebo. When the news broke about that, everybody forgot about Leif, which was just fine with him.

So back to Leif’s current plan, which was to make a run for it…as Leif opens the door and starts to get out, the car begins its backwards journey. Seeing that old fart stuck on that police car door with his head out the open window was one of the funniest things I had ever seen, and instead of trying to help, I started to laugh.

My laughing made Leif madder than he was in the bank lobby, especially when I started yelling at him that he must be the greatest criminal mind of our time to think up such a foolproof plan!

As I said, I know I should have done something, but the whole scene was just too funny.

Here was Leif stuck through the door of a police car that was in reverse heading toward Herb Shutterdam’s ice cream truck while the chief of police and the bank manager stood frozen in place wondering just what the hell was going on.

As we picked up speed, I noticed through the windshield that behind Chief Olaf, Clyde Dartsworthy was filming the goings on with his new cell phone. Clyde operates the town sewage treatment plant, and other than the widow Mellon, nobody seems to want to get real close to Clyde.

As soon as I saw him with that cell phone I started to feel a bit sad for the widow Mellon since she was missing the biggest thing to happen in this town…ever, and it was her that was at the center of the whole damn thing.

Anyway, Herb seeing the police car heading right towards him, finally engages his brain and moves his worn out ice cream truck out of harm’s way just as the police car enters the extra wide wheel chair ramp that will, at its end, deposit the police car, me, and Leif, in the fountain in the middle of the town square.

And just as I was thinking about this, there was a loud thud, followed by a splash, followed by Leif falling into the fountain as he screamed in a high pitched voice for me to save him because he couldn’t swim.

I sat in the barbershop telling my new tale and explaining that in the end, it never occurred to Chief Olaf that master criminal Leif was trying to implement a dastardly plan that could not be foiled.

Instead, it seems the Chief wrongfully assumed that the running car had jumped into reverse just as he had read in True and Real Crime Drama Magazine.

My rendition of the events as they happened, while not being exactly chronologically correct, once again branded Leif the guffaw king, and with any luck my tale will survive long after Leif and I are banished to the great bank lobby in the sky.

As to the companies in the Drug Store Industry?

Well…..as it happened, Leif’s daughter Willow had bought the house across the street from her dad’s house, and on that fateful day was in the process of moving her family of one husband and seven cats into their new digs.

It seems that Leif is allergic to cats, but cats love Leif, and by the third day following Willow’s arrival, Leif couldn’t stop sneezing.

He would sneeze and sneeze and sneeze. Then he would start cussing those cats for all he was worth. Seems the more he cussed those cats, the more they would stay around his house, and the more Leif would sneeze.

Taking pity on him, I collected some allergy medicine coupons and took them over. When I dropped them off I told him that his allergies were justice for being such a jerk, which reminded him of his request for information on the drug store industry.

Allergy medicine is 20% off I told him and that’s all you’re getting until you pay me. Just as he started to cuss at me again, I pulled Elizabeth, a longhaired Himalayan cat, from behind my back and before I could say grace, old Leif was grabbing his checkbook.

I reminded him of the price and was pleasantly surprised when I realized he paid me a touch extra. I had asked for $1500, but generous Leif paid me $5100.

In fairness to myself, I did try and explain his mistake to him. But with all that sneezing and snorting after I dropped Elizabeth in his lap…I don’t think he heard me.

Wax

 

According to Yahoo, there are 54 companies in this industry. Of those 54, I have seven (7) on my watch list.

The average price of those seven stocks as of the end of business on 05/09/08, is $30.66, with my average reasonable value estimate at $41.59, my average Buy target at $20.80, my average First Sell target at $40.55, and my average Close target at $43.90.

In addition my average Risk Reward for these seven stocks is 4.2, meaning that in comparing my average reasonable value estimates for these stocks with recent prices, the stocks average 4.2 times more upside reward than downside risk. I personally won’t buy a stock until the risk reward is at 5.

If anyone is interested in my thoughts on these seven stocks, just let me know. Personally, I wouldn't waste my time with them, but that's just me.

13 Comments – Post Your Own

#1) On May 11, 2008 at 11:46 AM, joeykid13 wrote:

Interesting...sounds alot like counting cards...did you go to MIT?

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#2) On May 11, 2008 at 12:26 PM, dwot (45.74) wrote:

That was cute.

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#3) On May 11, 2008 at 4:59 PM, devoish (96.28) wrote:

How is the Widow Mellon?

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#4) On May 11, 2008 at 8:09 PM, TMFHelical (99.12) wrote:

There is a lot going on in the drugstore industry.  Wal-mart making many generics incredibly cheap, and trying to drive traffic.  The CVS-caremark merger was certainly a move that could be transforming for the industry, but perhaps not as much as their plan to open clinics within the stores themselves (Wal-mart thinks this has merit as well).

http://www.boston.com/business/articles/2007/05/02/cvs_seeks_to_open_clinics_in_its_stores/

An industry in transition IMO.  Not sure how to play it right now myself.  

Zz

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#5) On May 12, 2008 at 3:00 AM, ricoy5 (26.27) wrote:

Love it... like Alice's Resturaunt.

So....  what's on your watchlist??? 

 

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#6) On May 12, 2008 at 5:16 AM, wax (97.63) wrote:

joey;

You're right, it is like card counting and no I didn't go to MIT, I went to Henry's School for Cabbies in the Bronx.

Wax

 

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#7) On May 12, 2008 at 5:20 AM, wax (97.63) wrote:

dwot...thanx for that, it was fun to write. As to the widow Mellon...devoish, you've discovered my hook to future ramblings...and she has survived by the way.

Wax 

 

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#8) On May 12, 2008 at 5:30 AM, wax (97.63) wrote:

HelicalZz;

WalMart of course is not considered a drug store, but you're right, at the moment they are the great unknown when it comes to that industry.

Personally I think that for the time being the only company that can compete with a WalMart is Walgreen's and the reason I think that compared to other companies in the industry they have very little debt.

My Walgreen thoughts...

Wax 

 

Walgreen Company, Inc. (NYSE: WAG) Financial data is based on the company’s most recent SEC 10-K filing for the year ended August 2007. 

The company, incorporated in 1909, operates retail drugstore chains that are engaged in the retail sale of prescription and non-prescription drugs, and general merchandise. 

General merchandise includes, among other things, beauty care, personal care, household items, candy, photofinishing, greeting cards, seasonal items and convenience foods.

Customers can have prescriptions filled at the drugstore counter, as well as through the mail, by telephone and via the Internet. 

During the fiscal year ended August 31, 2007 (fiscal 2007), the Company opened or acquired 563 stores, not including 58 locations acquired from Option Care, Inc. The total number of locations, at August 31, 2007, was 5,997 located in 48 states and Puerto Rico. The Company announced that it has created a Walgreens Health and Wellness division. 

Short-Term Investor

For the short-term trader, based on a recent close of $34.99, the stock has first resistance at $36.42, a 4% increase from recent levels, second resistance at $38.91, an 11% increase from recent levels, and first support at $32.50, a 7% decrease from recent levels.

Long-Term Investor

For the long-term, 3-5 year hold, investor, the stock is on my watch list with a reasonable value estimate of $53.73, a Buy target of $26.87, a First Sell target of $52.39, and a Close target of $56.71. The stock currently has a risk reward ratio of 4.0.

Investment Fundamentals

For fiscal 2007, the company earned $1.37 per share, and based on a recent price has a PE ratio of 25.6. Also for fiscal 2007, the company had a Return on Invested Capital of 27%, Average Free Cash Flow of $2.08 per share, a Tangible Book Value of $9.98, and paid a $0.31 dividend. 

Additionally, the company had a cash conversion cycle of 45 days, an Enterprise Value of $35.61 per share, an Equity Value of $34.37 per share, a Current Ratio of 1.41, a Quick Ratio of 0.40, a Cash Ratio of 0.04, and a Flow Ratio of 1.58. 

Investment Opinion

If I were going to invest in a company in the Drug Store Industry, Walgreen’s would be the one. Unlike Rite Aid, the company has managed to add stores, which have added to sales and earnings, and low and behold, the company has done it with no increase in debt levels. In fact, the company has no long-term debt and short-term debt of $0.87 per share, and increase of $0.49 over the prior year.

I admit that the company's ratios are not what I would consider investment grade at the moment which is the main reason I have no interest in owning this stock at the present time as either a short-term trader a long-term investor.

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#9) On May 12, 2008 at 5:40 AM, wax (97.63) wrote:

Hi Rico;

Wow..Alice's Restaurant...I haven't heard that name used in a very very long time.

Wax 

The stocks on the list are CVS Caremark Corporation (NYSE: CVS), Longs Drug Stores, Inc. (NYSE: LDG), Medco Health Solutions, Inc. (NYSE: MHS), Omnicare, Inc. (NYSE: OCR), PharMerica Corporation (NYSE: PMC), Rite Aid Corporation (NYSE: RAD), and Walgreen Company, Inc. (NYSE: WAG).     

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#10) On May 12, 2008 at 1:34 PM, Tastylunch (29.40) wrote:

You good sir, have got some serious writin' chops.Your friend's money would be better spent having you write a script based himself than wasting everbody's time with drug stores. Love your posts.

 

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#11) On May 12, 2008 at 5:00 PM, wax (97.63) wrote:

Tastylunch;

Thanx for the kind words...from time to time my brain just goes a bit haywire. It's sort of fun actually.

Wax 

 

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#12) On May 13, 2008 at 4:04 AM, 82574 wrote:

Bonne journe'e, mais, j' ai  mal a la tête!! Bon nuit.

Kahuna,CFA

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#13) On May 13, 2008 at 5:50 AM, wax (97.63) wrote:

Wow Mr Kahuna, CFA...french. Don't have a clue what you posted but my mental gears are turning for a future investing story. Thanx and..."Bonne journe'e, mais, j' ai  mal a la tête!! Bon nuit." to you too...in fact....two of them.

Wax 

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