Stock Option Investment Advice

Surge in Walgreen (WAG) Shares

Walgreen’s (WAG) fiscal first-quarter net income rose 5.5% amid solid revenue gains and cost controls, as the company bounced back from a rough fiscal fourth quarter.

The drugstore chain recorded a net income of $455.5 million, or 46 cents a share for the period ended Nov. 30, compared with $431.7 million, or 43 cents a share, a year earlier. Revenue rose 10% to $14.03 billion, as comparable-store sales rose 5.4%.

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The increase in income has been attributed to strong sales in the private-brand products and strong expense discipline. Prescription sales, which accounted for two-thirds of total sales, rose by 11%, while the number of prescriptions filled climbed 3.7% on a comparable-store basis.

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In August, Walgreen had closed its $760 million acquisition of specialty pharmacy company Option Care Inc. The move continued a push Walgreen is making to become more of a health-care provider, as the firm has bought a number of small, specialty pharmacies over the past two years that focus on a relatively narrow range of health problems.

Walgreen opened 169 stores in Q1, and plans to open 550 in 2008. As of November 2007, the company operated 6,139 stores and said it will exceed its operating goal of 7,000 stores in 2010. The company added that it sees a long-term potential for about 13,000 stores in the United States.

Over the past 10 years, Walgreen’s revenue and earnings-per-share have grown steadily at an average annual rate of 15% and 16%, respectively. Moreover, the company has competitive advantages that should help it maintain this enviable growth record.

In particular the firm is noted for its customer-oriented philosophy and real estate acumen. It is adept at locating freestanding stores on prime corners, with each site required to meet multiple criteria based on traffic flow, demographics and other factors.

In addition, Walgreen is innovative. The firm pioneered the concepts of a drive-thru pharmacy and keeping selected stores open 24 hours. It was also the first drugstore chain to offer prescription drugs in multiple languages.

Competition: Two strong competitors for Walgreen are CVS (CVS) and Rite Aid (RAD).

The CVS pharmacy chain fills more prescriptions at more drugstores than any other drugstore operator, although it trails rival Walgreen in total sales. Following its acquisitions of the Eckerd chain and stores from Albertsons, CVS operates more than 6,200 stores in some 40 states. More recently, CVS purchased prescription benefits management (PBM) firm Caremark Rx for about $26.5 billion. Caremark was combined with CVS’s PBM and specialty pharmacy subsidiary PharmaCare Management Services, which offered managed-care drug programs to insurers, employers, and other healthcare plan providers, to form Caremark Pharmacy Services.

Rite Aid is the nation’s #3 drugstore chain (behind Walgreen and CVS), the company runs more than 5,100 drugstores in 31 states and Washington, DC. Rite Aid stores fill prescriptions (nearly two-thirds of sales) and sell health and beauty aids, convenience foods, greeting cards, and other items, including more than 2,600 private-label products. More than half of Rite Aid stores are freestanding.

Covered Calls:
For covered call investing, it is important to find good companies with strong business fundamentals. Covered calls provide investors the potential to generate monthly option income. The following covered call investing positions were found for Walgreen and its competitors using PowerOptions search tool.

PowerOptions covered call search
Option Strike
WAG 38.62 (-0.40) WAGBU 08 FEB 37.5 (52) 1.95 5 2.3 2.3
WAG 38.62 (-0.40) WAGBH 08 FEB 40.0 (52) 0.7 1.8 1.8 5.5
CVS 39.80 (-0.13) CVSBH 08 FEB 40.0 (52) 1.4 3.5 3.6 4.2
RAD 2.97 (+0.02) RADAZ 08 JAN 2.5 (24) 0.55 18.5 3.3 3.3
RAD 2.97 (+0.02) RADBZ 08 FEB 2.5 (52) 0.55 18.5 3.3 3.3
(For more details click the ticker symbol above)

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[tags] CVS, CVS, CVS Corp., RAD, Rite Aid Corp., WAG, Walgreen Co., covered call investing, covered call investment strategy, investment strategy, iron condor, option income, poweroptions, stock option trading, stock options [/tags]

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