Walgreen's Feels Wal-Mart Pressure

While maintaining a pristine balance sheet, management continues Walgreen Co.'s (WAG) new store expansion strategy. However, pharmacy profits are being pressured due to lower reimbursements on some generic drugs and additional pricing pressure from Wal-Mart (WMT), which has entered the retail generic marketplace.

In response, management is trying to better utilize the existing store space and drive increased customer traffic through its stores by offering new services like convenient care clinics. The Hold rating on Walgreen is maintained.

Near term, Walgreen is experiencing higher expenses and increased demand for low-margin prescription mail services and the new Medicare prescription drug program. Any earnings disappointment may have an exacerbated effect, due to the stock's premium valuation.

Walgreen is currently selling at 17.3 times trailing 12-month EPS. Having declined from an unsustainable 60 P/E in late 2000, the stock settled in the 22 to 34 multiple range for four fiscal years (FY2003 through FY2006). However, when Wal-Mart aggressively entered into the retail generic drug marketplace, Walgreen's P/E multiple was compressed to the 21 to 24 range.

Then following the disappointing earnings report of the fiscal fourth quarter of fiscal 2007, the stock subsequently traded down to a 16 P/E. The target price of $38.75 is based on an 18.5 P/E on trailing 12-month earnings.

U.S. Market Weighs on Paccar

Paccar, Inc. (PCAR)  is benefiting from rising prices and increasing market share, along with strong growth in Mexico and Australia. However, a strong Class 8 market downturn in the U.S. leads us to rate the stock a Hold, with a target of $55.00. This is 16.2x our 2008 earnings estimate.

The company's base business in the U.S. and Europe is improving, aside from cyclical effects. Average transaction prices are rising about 5% in both North America and Europe due to the increased emission content.

Paccar continues to increase its market share in the U.S. and Canadian Class 8 retail sales. Truck demand in Europe and international markets is strong. On the other hand, Paccar has leading share in both Mexico and Australia, both of which are seeing a surge in demand ahead of 2008 emissions deadlines.

Over the past three years, Paccar also invested $978 million to repurchase 27.4 million shares and paid over $1.7 billion in dividends to the shareholders for a total return of over $2.7 billion. Recently, the company paid an extra cash dividend of $1 per share. Currently, the stock is valued at 15.7x our 2008 earnings of $3.40.