Cabot Analyst Roy Ward on Xerox and Walgreen’s

Reprinted from Money interview with J. Royden Ward on July 8, 2013:

Steven Halpern of The Money Show Interviewed Cabot’s Roy Ward on July 8, 2013. Here’s a transcript of the interview:

STEVEN:  We’re here today with Roy Ward, Editor of Cabot Benjamin Graham Value Letter.  Thanks for taking the time to talk today.

ROY:  You’re welcome, Steve.

STEVEN:  All of our listeners are familiar with Warren Buffett, but many may not know that Buffett was a student of Ben Graham, who has been called the father of value investing. Could you tell us a little about Graham and his value philosophy?

ROY:  Sure. Benjamin Graham was born in 1894, which is a long time ago, so his analyses and methodologies date back to the 1920s and 1930s, and 1940s, but they still work today. Ben Graham taught, among other things, finance and investments at Columbia University, where Warren Buffett was a student. They got to know each other there, and Warren Buffett began working for Benjamin Graham a few years later. Ben Graham’s most well-known book is The Intelligent Investor, which is an easy read, really. In it, you can understand not only his philosophy but also all the formulas he uses to find undervalued stocks.

STEVEN:  Now, have you found that over the years that Graham’s criteria for selecting value stock has remained the same or are there things you had to do to update his strategy for the current market?

ROY:  I’ve kept it the same. Whether the market’s going up or going down, it seems to work very well. The stocks that come up as bargains using his criteria do quite well in up markets or down markets, and current markets or past markets.

STEVEN:  I’ve seen your latest newsletter that you called Xerox a bargain. What makes the stock attractive?

ROY:  Going by the numbers initially, it’s got a PE of 9.3, which is a current PE and I’ve priced the book value right around 1. Those are both bargain ratios, also yields of 2.4%. In addition, it has a low price to cash flow ratio of only 4.2 times, and that’s really low. Looking at the numbers, it’s a real bargain. In addition, it’s a good, quality company. It has a strong balance sheet. Also, looking forward, it looks like sales and earnings are in transition period this year, but it looks like growth will ramp up in 2014 and beyond.

STEVEN:  Also, you’ve been looking at Walgreens Company that’s been around for over 100 years, and you’ve noted the sales and earnings recently were disappointing, but that hasn’t kept you from being bullish on the stock long-term. Could you tell us your outlook for Walgreens?

ROY:  Yes. They lost quite a bit of business to CVS last year. Walgreens’ contract with Express Scripts was allowed to lapse for nine months during 2012 and, during that time, CVS picked up a lot of business that was formerly Walgreens’. Walgreens is beginning to get that business back, and actually they’re getting more business than they originally thought. They thought they would lose quite a bit of that business permanently, but it’s coming back faster than they thought. In addition, they’ve inked a deal with Alliance Boots of England and acquired a 45% stake in that company, and that’s an international pharmaceutical business that’s mostly in wholesale. That should boost Walgreens’ sales and earnings quite a bit and Walgreens should wind up with quite a bit higher growth rate going forward. During the year this year, I think, again, Walgreens is in kind of a transition area, but next year things should start to pick up and Walgreens should get back to a more normal growth rate.

STEVEN:  Well great. We really appreciate you taking the time to speak with us and particularly sharing some of your current stock picks. Thank you.

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