The Zacks Analyst Blog Highlights: Express Scripts, Walgreen, Starwood Hotels & Resorts Worldwide, Marriott International and Wyndham Worldwide

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Mar 07, 2012, 09:30 ET

CHICAGO, March 7, 2012 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Express Scripts (Nasdaq: ESRX), Walgreen (NYSE: WAG), Starwood Hotels & Resorts Worldwide Inc. (NYSE: HOT), Marriott International Inc. (NYSE: MAR) and Wyndham Worldwide Corporation (NYSE: WYN).

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Here are highlights from Tuesday's Analyst Blog:

ESRX Hurts Walgreens Comps

The termination of the Express Scripts (Nasdaq: ESRX) contract continues to affect Walgreen (NYSE: WAG) sales. Comparing the first 28 days in February 2012 with February 2011, the company recorded a modest 1.5% year-over-year growth in sales to $5.86 billion for the month of February 2012. Total front-end sales increased 6.9% with a 2.0% rise in comparable store front-end sales.

Prescriptions filled at comparable stores decreased 9.5% in February this year. Lower incidence of flu (down by 1.2 percentage points) and the negative impact of the contract termination with Express Scripts (10.7 percentage points) were primarily responsible for the lower prescriptions filled in comparable stores. In February 2011, prescriptions processed by Express Scripts comprised 12.6% of Walgreen prescriptions.

Pharmacy sales, accounting for 61.6% of total sales, in February, decreased 1.4% with an 8.6% decline in comparable pharmacy sales. Comparable pharmacy sales witnessed a negative impact owing to the introduction of generics in the last 12 months (2.2), lower incidence of cough, cold and flu (2.4) and the Express Scripts contract loss (10.6 percentage points). The lower incidence of cough, cold and flu led to a decline in the number of flu shots administered to 5.5 million for the season-till-date compared to 6.3 million in the previous year. Sales in comparable stores decreased by 4.6%.

In February, Walgreen opened 10 stores including 1 relocation, and 1 acquired.

As per this preliminary announcement, Walgreen's total sales for the second quarter of fiscal 2012 were $18.63 billion, up 0.7% year over year. Fiscal 2012 year-to-date sales for the first six months were $36.79 billion, up 2.6% from the comparable period last year. Calendar year-to-date sales were $11.64 billion, down 0.6% from $11.71 billion in 2011.

At February 29, Walgreens operated 8,290 locations in all 50 states, the District of Columbia, Puerto Rico and Guam. With the intention of retaining some of Express Scripts' clients, Walgreen recently came up with its comprehensive Patient Transition Plan, which will enable the smooth transition of existing members of the Express Scripts pharmacy network to another community pharmacy. Under this plan, Walgreen is providing several discounts to the members of Walgreen Prescriptions Savings Club, which facilitates savings on over 8,000 brand names and all generic drugs.

Meanwhile, Walgreen is expanding its business with other payers and customers and implementing cost-control initiatives. The company is reassured by the fact that more than 100 of Express Scripts clients, encompassing health plans and employers, would continue with Walgreen pharmacies in 2012. The company aims to retain 10 million prescriptions annually and maintain 97-99% of the 2011 prescription volumes at fiscal 2012 end.

Our Take

Despite its best efforts to counter the loss of the Express Scripts contract, which accounted for 7.3% of total sales in fiscal 2011, Walgreen's financials will, nevertheless, be affected by the loss of the contract. Although the company is expecting to retain 75% of its business, we await further clarity regarding this.

On a long-term horizon, we are nonetheless optimistic about Walgreen. The introduction of new generics should help improve the company's gross margins in the second half of fiscal 2012. Moreover, a strong cash balance enables the company to reward its shareholders. During the last reported quarter, the company enhanced shareholders' value through dividend payments and share repurchases amounting to $803 million ($601 million in share repurchases and $202 million in dividends). In the last eight years, the company's dividend has grown at a compound annual growth rate ("CAGR") of nearly 22%.

Currently, Walgreen retains a Zacks #4 Rank (short-term Sell rating). However we have 'Neutral' recommendation on the stock over the long term.

Starwood Downgraded to Neutral

We have recently downgraded our rating on the shares of Starwood Hotels & Resorts Worldwide Inc. (NYSE: HOT) to Neutral from Outperform due to a slowdown in 2012 RevPAR growth target in North America, weak EBITDA projection as well as weakness in certain international markets.

We were impressed with Starwood's outperformance in the recently concluded fourth quarter of 2011. The strength of the namesake brand allows the company to charge a premium for its hotel rooms. Moreover, the company is in a steady expansion mode. Starwood has over half of its hotel properties outside the U.S., an international exposure that not many of its peers can boast of. Starwood will open 80 new hotels in 2012, with 75% of them being outside North America, primarily in the faster growing Asia (60.0%). The company's balance sheet also remains in good shape.

However, although we believe that Starwood is well positioned for the long term, we expect the operating environment to weaken in the near term before improving. In the developed markets, unemployment remains extremely high and the pressure of public and private debt is mounting, leading to a slower pace of recovery. Management expects lodging recovery in North America to be slower in 2012 than 2011.

Exchange rate shifts will negatively impact Starwood's hotel business in 2012. EBITDA will be hurt by approximately $7 million net of benefits from Euro hedge. Additionally, there are several Starwood properties awaiting renovations in 2012. Hence, 2012 renovations and the hotels sold in 2011 will adversely impact the company's total owned EBITDA by $10 million.

To add to the worry, there is the Eurozone debt crisis. RevPAR was flat in Europe in the fourth quarter of 2011 due to the austerity measures and fragile economic conditions in Europe. Management commented that softness in demand will likely loom in future, despite the adoption of crucial measures in resolving the crisis. Deceleration in European RevPAR is a cause of concern given Starwood's considerable exposure to that region.

The other geographies are also not in a very good shape. Unrest in Middle East and Africa as well as the Korean Peninsula remains another area of apprehension. In Japan, although occupancies recovered well from early 2011, revival of average daily rate was still down compared to the pre-earthquake level. In fact, China, Starwood's one of the strongest hubs, targets economic growth of 7.5% in 2012. It is the slowest rate since 2004.

Moreover, we believe all the positive attributes in the stock are reflected at the current level. Hence, in light of the current state of industry fundamentals, we recommend investors to remain on the sidelines.

Starwood, which competes with the likes of Marriott International Inc. (NYSE: MAR) and Wyndham Worldwide Corporation (NYSE: WYN), currently retains the Zacks #3 Rank that translates into a short-term Hold rating.

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