WALGREEN CO. Brandon Lee Minghui Li Jeremy Smith April 29, 2008.
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Transcript of WALGREEN CO. Brandon Lee Minghui Li Jeremy Smith April 29, 2008.
WALGREEN CO.Brandon LeeMinghui LiJeremy Smith
April 29, 2008
Agenda
Company Overview
Industry and Economic Analysis
Valuation
Recommendation
Q & A
Company Overview Walgreen company operate retail drug store chains that are
engaged in the retail sale of prescription drugs, non-prescription drugs, and general merchandise.
In 2008, it opened 536 net new stores for a total of 5997 Walgreens in 48 states and in Puerto Rico.
It is the fastest growing retailers in the US, and is the leader in the chain drugstores.
Ranked 44th on the Fortune 500 list of the largest US-based companies.
On the list of Fortune’s magazine’s Most Admired Companies in America for the last 14 consecutive years.
Business
Drugstores
Prescription drugs
NonprescriptionDrugs
General merchandise
Take careHealthclinics
Home infusionTherapy provider
Specialty pharmacy
Product class
2007 2006 2005 2004
Prescription 65% 64% 64% 63%Non-prescription 10% 11% 11% 12%
General Merchandise 25% 25% 25% 25%
Prescription sales continue to become a larger portion of the company’s business. Aging population Introduction of lower priced generics Continued development of innovative drugs
Growth Strategy
Stores
0
1000
2000
3000
4000
5000
6000
7000
2003 2004 2005 2006 2007
Stores
Opening new stores Walgreen expected to operate more than 7000 stores in 2010
Growth Strategy
Acquisitions provide a unique opportunity and strategic fit for Walgreen business.
Fiscal 2007: 100% of the outstanding shares of Option Care, Inc. and affiliated
companies Positioned Walgreen as the nation’s largest home infusion therapy
provider and the fourth largest specialty pharmacy provider. 100% ownership of Take Care Health System, Inc and LLC, a
convenient care clinic operator Selected assets of Familymeds Group, Inc. Remaining minority interest of SeniorMed LLC.
Growth Strategy
Investment in technology and customer service initiatives
Revenue (from 1998 to 2007) $Mil Fiscal year-end: 8
Fundamental Multiples
P/E ratio kept declining stably with the increases in sales. Underlying story remains unchanged. Investors reconsidered the intrinsic value and the risk in the
business of Walgreen.
Walgreen Outlook Advantages:
Good reputation: Walgreen is a quality name. Convenience of locations: Walgreen stores usually
position on high traffic corners, and around large residential locations.
High market share translating into scale benefits. Pricing advantage results from scale and high volume. Aging population
Risk factors: Peaking generic drug cycle: It is anticipated that there
are no major generic drug introductions in 2008. Store saturation Competition from CVS/Caremark
Major Financial Activities Stock repurchase program:
• 2007 repurchased program: up to $1billion of the company’s common stock, expiration date on January 10,2011.
• 2004 repurchased program: completely executed in three years
• During fiscal 2007, the company purchased $344.9million of shares related to the 2007 repurchased program, 343.2 million of shares related to the 2004 repurchased program
Short-term borrowings: In the fiscal 2007, the company issued commercial paper to support working capital needs.
Credit ratings as of August 31, 2008:
Rating Agency Long-term debt ratings Commercial paper rating
Moody's Aa3 P-1
S&P A+ A-1
Industry Overview Retail (Drugs) Industry
Highly competitive Saturated market Companies looking to enhance retail channels through online
and mail order sales Rx sales $259.36 Bln in 07’ vs. $250.64 Bln in 06’
Main Competitors: CVS Caremark, Medco, Rite Aid
Industry Business Segments: “Prescription drugs, proprietary drugs, and non-prescription
medicines, and which may also carry a number of related lines, such as cosmetics, toiletries, tobacco, and novelty merchandise”
Industry Performance
Walgreens, Co. (2007, Oct 26) Retrieved April 26, 2008, from SEC.gov
1 Yr. Stock Performance
http://finance.yahoo.com/q/bc?s=WAG&t=1y&l=off&z=m&q=l&c=CVS,MHS,RAD,%5EDJI; Accessed: April 25, 2008.
Macroeconomic Overview
Credit Crunch Since late 2007, economic slowdown in response to
housing woes Tougher for companies to access cheap debt
Slowed Growth in GDP Decline in Consumer Confidence
Provides insight to market direction @ a 5 year low (March 2003, 61.4)
http://www.conference-board.org/economics/consumerConfidence.cfm
Decline in Consumer Confidence Provides insight to
market direction @ a 5 year low
(March 2003, 61.4)
Macroeconomic Overview
Macroeconomic Factors Rapid growth in price of Oil High prices have a negative impact on the economy
Costs to the businesses increase
http://quote.com/us/futures/chart.action?s=CL+M8&chartUi.period=M&chartUi.bardensity=LOW&chartUi.bartype=AREA&chartUi.size=620x300&chartUi.minutes=; Accessed: April 1, 2008.
RCMP Position:
Purchased 1000 shares of WAG on October 6th, 1999 for $25.00/share.
On September 20th, 2006, sold 500 shares @ $49.94/share for a realized gain of $12,470.
Currently own 500 shares of WAG, trading at $35.48 as of April 28, 2008 for an unrealized gain of $5,240 or 41.92%.
RCMP PortfolioRCMP Portfolio (4/28/2008)
Cash, 43.47%
AEE, 5.10%AEO, 7.58%CPRT, 8.14%
DO, 3.68%
FR, 8.84%
JKHY, 2.94%
KMB, 5.38%
SRCL, 6.07%
WAG, 4.98%
WFR, 3.83%
Correlation:
Operating Leases:
Operating leases are not reflected as assets or liabilities on the balance sheet. Does not reflect the cumulative economic liability
for all future lease payments Results:
Reduce the likelihood of a debt covenant violation Increase ability to obtain future additional loans Improve financial ratios like debt-to-equity ratio
Lease Obligations:
Walgreens owns 19.1% of its stores, leasing the remaining 80.9%.
Present value of lease obligations is $14.219 billion Can be viewed as debt
Should consider the risk of this these lease obligations
DCF Assumptions: WACC Calculation:
Weight of Equity: 100% Weight of Debt: 0% Rf = 4.05% Beta = .75 (taken from March 2008 Value Line) ke = 8.55% Long Term Growth Rate = 4.00%WACC = 8.55%DCF Value = $35.19DCF Range = $31.67 – $38.71
Comparables:
Source: http://finance.yahoo.com/q/co?s=WAG; Accessed: April 28, 2008
Recommendation:
HOLD existing 500 shares of WAGConsistently beating Wall Street expectationsContinues to open new stores at 8% rate per
year