There is a well known rule in negotiation that one must always be willing to walk away. Just as important is that the other party believes you are willing to walk away. Therefore, I expected nothing short of tough talk from the management of Walgreen's when they discussed their negotiations with Express Scripts on today's earnings conference call. I expect they will talk in this manner until the day they announce an agreement with Express Scripts. The analysts freaked out for the umpteenth time about this issue.
Walgreens is expected to earn $3.55 next fiscal year (Aug 2013) and trades at around $35. They have less economic sensitivity than most businesses and have secular tailwinds of aging baby boomers and a generic wave. In the current quarter they repurchased $600 million worth of shares, which is equivalent to 8% of the shares outstanding on an annualized basis. They also pay a 2.6% dividend. During the current quarter they returned cash to shareholders at a greater than 10% annualized rate. I would also note that their earnings is more valuable than most companies because their business is domestic and they pay US taxes. They are not one of those multinationals who has cash overseas that cannot be used for anything.
Walgreen's is simply driving a hard bargain, which will benefit shareholders in the long run. Wall Street cannot look past this week. I believe that I am getting a bargain because of this shortsightedness. I am long Walgreen's common stock and CALLs.