Vilas Fund’s Investment Thesis for Walgreens

Walgreens is a compelling buy. The company is trading at roughly 10 times next twelve-month net income estimates, grew its earnings per share by 27% last quarter, continues to gain market share both organically and through store acquisitions, and should continue to grow markedly faster than nominal GDP with rising prescription volume derived from new therapies and the aging population worldwide. Because the company has compounded its earnings per share at roughly double the pace of the S&P 500 for a very long time, the shares have averaged roughly 22 times trailing earnings over the last 30 years, ignoring the late 1990's bubble period. Below please see the chart of Walgreens' next 12 months' P/E ratio, which is currently near the financial crisis lows:

If we assume that Walgreens continues to grow its earnings to $8 per share in three years, in line with current analyst estimates, and sells at 16 times those earnings per share, far below its long-term average, the stock would reach $128, a double from today's price of $64. However, with this better-than-average growth, the multiple could rise back to its long-term average of 22 times earnings. This would equate to $176 per share, up 175% from here. Because of this, we think that Walgreens will be the largest creator of profits in the Fund over the next few years.