drugstore.com a Buy
Posted Mon Jan 29, 10:48 am ET
by Rob Plaza, CFA (zacks)
We are upgrading drugstore.com (DSCM) shares from Hold to Buy. drugstore.com’s strategy of improving its profit margins is finally gaining traction. We became more positive on the stock in October, when we upgraded the stock from Sell to Hold. We now believe the recent pullback in its stock price represents a good entry point.
We expect the company to become profitable by the fourth quarter of 2007 and become profitable on an annual basis in 2008. Our target price is $4.50, which is based on a price-to-sales ratio of 1.0x our 2007 sales estimate. The company is scheduled to report fourth quarter results after the market close on January 31.
The company believes its online stores, including drugstore.com, beauty.com, and visiondirect.com, offer a better way for consumers to shop for these products. Customer loyalty is strong. Repeat customers represent approximately 80% of sales. The company operates primarily in the U.S. and Canada, but its products are available to consumers worldwide.
DSCM shares trade at a discount to its industry peers based on price-to-sales and price-to-book ratios. The company has no earnings and, thus, no price-to-earnings multiple. In our view, the company’s lack of profits and difficult competitive environment warrant a discount valuation relative to its peers. That said, with the company moving closer to becoming profitable, its stock should still be able to trade at 1.0 times our 2007 sales estimate, or $4.50 per share. |
