(NASDAQ: WBA)
Analysts Team:





Aditi Das
Xuan (Lucy) Liang
Zhi Cheng (Nicole) Low
Jordan Peasel
Yue (Benjamin) Xu
Presented on November 12th, 2015
Business Overview
Industry Overview
Financial Analysis
DCF Valuation
Comparable Valuation
Stock Analysis
Recommendation
Date
October 6, 1999
Action
Purchased 1000 shares @$25/share (Cost Basis: $25,000)
September 20, 2006 Sold 500 shares @ 49.94
November 22, 2013
Sold 200 Shares @ 60.35
TODAY
Current Position: 300 shares trading at $81.82/share (Cost Basis:
$24,546)
Capital Gain: $17,046
Yahoo! Finance Investment Holding
2015 WBA 10-K Pages 2-3
Retail Pharmacy
USA
•
•
•
•
Continues the Legacy of Walgreens
Operation of Retail Drugstores
Convenient Care Clinics
Specialty Pharmacy Services
Retail Pharmacy
International
•
•
•
•
Continues the legacy of Alliance Boots
Beauty Retail Operations Comprised of Retail Drugstores
Optician Stores
Contract Manufacturing Operations
Pharmaceutical
Wholesale
• Continues the Legacy of Alliance Boots
• Pharmaceutical Wholesaling and Distribution Business
Seek and
Seize further
synergy
opportunities
Seek to
generate and
seize
relevant M&A
and strategic
investment
opportunities
Boost Organic
Growth
FORECASTED HEALTH CARE SPENDING AS % OF GDP UP TO FY18
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
Latin America
Asia
2015 Healthcare Spending
Western Europe
North America
Forecasted Growth in Healthcare Spending
WBA April Annual Report, http://www2.deloitte.com/global/en/pages/life-sciences-and-healthcare/articles/global-health-care-sector-outlook.html,http://www.eiu.com/industry/Healthcare
Product Breakdown
2%
10%
4%
Groceries and Food Items
5%
Dietary Supplements
10%
Personal Health Supplies
Branded Prescription Drugs
10%
Nonprescription Medicines
Generic Drugs
5%
Branded Generic Drugs
54%
Other
Market Share
10.30%
58.10%
Revenue
263 Billion
CVS
Profit
10.3 Billion
Walgreens Boots
Alliance
Past Growth
1.3%
Expected Growth
2.9%
Rite Aid
31.00%
http://clients1.ibisworld.com/reports/us/industry/default.aspx?entid=1054
Industry Statistics
IBIS WORLD
Adults Aged 65 and Older
Federal Healthcare Spending
Unemployment Rate
Disposable Income
~4600 Stores
Rite Aid Overview
• Perfect Pharmacy Comparable
to WBA
• Distributor-McKesson
• 62.2% of COGS
• Heavy store concentration in
the New England Area
Transaction Overview
• WBA is offering $9 per share cash
• Closing of 1,000 stores if approved
by regulators
• Over $1BN of expected synergies:
• Cost Savings
• Operational Synergies
• Expected to be realize within
3-4 years of store closures
WBA 2015 Investor Roadshow
~8200 Stores
•
•
•
•
• Synergies of strategic
acquisition
• Patent cliff
• Increasing aging
population
• Health care reform
2015 WBA 10-K Part A
• High reliance on the
third party player
• Simple business model
2rd marketplace
Footprint
Strong CRM initiative
Bargain power
Strength
Weakness
Opportunity
Threats
• Mail order
• CVS looking to expand its
footprint
• Lower reimbursement rate
• Federal Trade Commission
regulation
•
•
•
A shift in pharmacy mix toward lower
margin plans and programs
Decrease in the introduction of new brand
name and generic prescription drugs
Generic drug inflation
•
Product
•
Third
Party
•
•
Strategy
Relationship with pharmacy benefit
management companies
Consolidation and strategic alliances in
the healthcare industry
•
Financial
•
2015 WBA 10-K Pages 7-22
Uncertainty of the realization
of anticipated benefits from
the acquisitions
Private Brand
Increasing Outstanding Debt
Regulation
Changes in Healthcare
Regulatory Environments
EPS (DILUTED)
PROFITABLITY ANALYSIS
20.00%
18.56%
16.48%
10.00%
13.52%
12.86%
15.00%
8.07%
7.39%
6.98%
$4.00
$4.00
$3.50
10.14%
10.10%
$4.50
$3.00
$2.94
$2.42
$2.50
5.58%
5.00%
$2.67
$2.00
$2.00
$1.50
0.00%
2011
2012
2013
2014
2015
Operating Margin
Net Margin
Return on Assets
Return on Equity
2011
70.00x
60.00x
50.00x
39.36x
16.19%
40.00x
21.91%
30.00x
22.38%
25.53x
20.00x
23.80x
9.78x
10.00x
0.00x
2011
2015 WBA 10-K Pages 49-53
42.55%
61.48x
23.02%
2012
2013
2014
$0.50
$-
LEVERAGE ANALYSIS
45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
$1.00
2015
Total Debt/Total Assets
LT Debt/Equity
EBIT Interest Coverage
Fixed Asset Turnover
2012
2013
2014
2015
GREENBLATT RATIOS
35.00%
28.85%
30.00%
25.29%
24.80%
25.00%
21.54%
20.55%
20.00%
15.00%
13.57%
9.16%
10.00%
8.69%
6.24%
5.57%
5.00%
0.00%
2011
2012
EBIT/Tangible Asset (ROIC)
2015 WBA 10-K Pages 49-53
2013
2014
EBIT/EV (Earnings Yield)
2015
• Patent cliff II is expected
to continue through FY15
• This will lead to the
replacement of branded
drugs by generic versions.
• Adopted the conservative
method
• Based on the organic
growth rate of WBA
• Factor in store closures
by reducing the revenue
streams by ~5% from
FY15-18.
• Boots UK Sales Comps
grew 3.5% yoy in FY15.
• This industry is
anticipated to grow at an
annualized rate of 3.4%
from FY15-20.
IBIS WORLD, WBA 4Q & FY2015 Earnings Conference Call
CAPM
Risk-Free Rate
Market Risk Premium
Beta (5-year)
2.34%
5.81%
1.18927
CAPM Cost of Equity
ROE on past 5 years
Adjusted Cost of Equity
9.25%
14.31%
11.78%
Yield of US 10-year Treasury Bill
Bloomberg
Weighted Average Cost of Capital
Current Share Price
Average shares outstanding (mil)
Market Value of Equity
$81.82
1053.9
$86,230.10
Market value of Debt (mil)
$14,383
Equity Weight
Debt Weight
85.70%
14.30%
Cost of Debt
Cost of Equity
4.21%
11.78%
Tax rate
30.00%
WACC
10.52%
Up to 11/11/2015
pp.348 10K
Bloomberg
(Millions)
EBIT
Less: Taxes
Plus: Depreciation
Less: Capital Expenditures
Changes in Net Working Capital
Less: Increses in A/R
Less: Increases in Inventories
Plus: Increases in A/P
Free Cash Flow
Present Value
Sum of Present Value of FCF
Key Rates Assumption
Bussiness Risk Premium
WACC
Discount Rate
Terminal Grow th Rate
Value Per Share
(Millions, Excepts Share Price)
Enterprise Value
Less: Debt
Market Capitalization
105,754
14,383
91,371
Share Price
$86.70
Upside (dow nside) potential
5.96%
2016E
9,057
(2,523)
1,674
(1,560)
2017E
10,640
(2,989)
1,752
(1,865)
2018E
12,235
(3,460)
1,817
(2,174)
2019E
13,688
(3,892)
1,851
(2,460)
2020E
15,476
(4,420)
1,921
(2,807)
1,175
657
(1,731)
6,749
6,079
$105,754
(279)
(394)
411
7,276
5,904
(215)
(303)
316
8,216
6,005
(75)
(106)
110
9,117
6,002
(227)
(321)
334
9,957
5,904
Term inal
127,925
75,860
Sensitivity Analysis
0.50%
10.52%
11.02%
3.00%
Discount
Rate
$86.70
10.02%
10.52%
11.02%
11.52%
12.02%
$
$
$
$
$
2.00%
90.08
83.73
78.09
73.05
68.52
$
$
$
$
$
Terminal Grow th Rate
2.50%
3.00%
3.50%
95.43 $ 101.54 $ 108.60
88.37 $ 93.63 $ 99.63
82.14 $ 86.70 $ 91.86
76.61 $ 80.59 $ 85.06
71.66 $ 75.16 $ 79.07
$
$
$
$
$
4.00%
116.82
106.55
97.76
90.13
83.46
CAPM
Risk-Free Rate
Market Risk Premium
Beta (5-year)
2.34%
5.81%
1.18927
CAPM Cost of Equity
ROE on past 5 years
Adjusted Cost of Equity
9.25%
14.31%
11.78%
Yield of US 10-year Treasury Bill
Bloomberg
Weighted Average Cost of Capital
Current Share Price
Average shares outstanding (mil)
Market Value of Equity
$81.82
1053.9
$86,230.10
Market value of Debt in Total (mil)
Market value of Debt of WBA (mil)
Market value of Debt of Rite Aid (mil)
$27,157
$14,357
$12,800
Equity Weight
Debt Weight
76.05%
23.95%
Cost of Debt
Cost of Equity
4.21%
11.78%
Tax rate
30.00%
WACC
9.66%
Up to 11/11/2015
pp.348 10K
Bloomberg
Bloomberg
(Millions)
EBIT
Less: Taxes
Plus: Depreciation
Less: Capital Expenditures
Changes in Net Working Capital
Less: Increses in A/R
Less: Increases in Inventories
Plus: Increases in A/P
Free Cash Flow
Present Value
Sum of Present Value of FCF
Key Rates Assumption
Bussiness Risk Premium
WACC
Discount Rate
Terminal Growth Rate
Value Per Share
(Millions, Excepts Share Price)
Enterprise Value
Less: Debt
Market Capitalization
Share Price
Upside (downside) potential
1.50%
9.66%
11.16%
3.00%
129,107
27,183
101,924
$96.71
18.20%
2016E
9,764
(2,687)
1,785
(1,560)
2017E
10,708
(2,959)
1,984
(1,865)
2018E
13,359
(3,745)
2,178
(2,174)
2019E
15,909
(4,505)
2,341
(2,460)
2020E
18,906
(5,394)
2,556
(2,807)
(2,290)
(2,902)
3,373
5,482
4,932
$129,081
(425)
(538)
626
7,531
6,094
(353)
(447)
519
9,337
6,797
(184)
(233)
271
11,139
7,294
(379)
(480)
558
12,960
7,635
Terminal
163,520
96,329
CVS Health Corporation
Segments
• Pharmacy Services (56.6%)
• Retail Pharmacy (44.4%)
• Corporate – Loss Adjustment
Distributors
• Cardinal Health (27.0%)
• McKesson (22.87%)
Walgreens Boots Alliance
Segments
• Retail Pharmacy USA (76.3%)
• Retail Pharmacy Int’l (13.4%)
• Pharmaceutical Wholesale (8.4%)
Distributors
• AmerisourceBergen (61.07%)
• Seat on BoD
Investopedia: What is the Pharmacy Benefit Management Industry, CVS 2014 10-k, WBA 2015 10-k
Comps Ratios
Tax Burden
Interest Burden
Operating Profit Margin
Asset Turnover
Leverage
ROE
EBIT/Tangible Asset
EBIT/EV
CVS 10K, RAD 10K and Bloomberg
•
Rite Aid has negative equity
•
CVS has higher tax burden
•
CVS – highest ROE in 5 years
DuPont Analysis
WBA
80.57%
89.77%
4.51%
1.95x
2.04x
13.01%
CVS
60.24%
87.26%
6.31%
1.91x
1.92x
12.16%
RAD
494.16%
50.63%
3.18%
3.36x
N/A
N/A
Greenblatt Analysis
WBA
28.85%
5.57%
CVS
36.80%
7.29%
RAD
17.49%
6.35%
•
CVS is generating more cash flow
from assets
•
RAD & WBA – similar cash flow
Comps Valuation
TTM P/E
Forward P/E
Price/Sales
Price/Book Value
Applying Comps Ratios
WBA
CVS
18.09
21.46
18.71
18.94
0.81
0.66
2.95
2.92
Valuation (without Rite Aid)
Applying CVS
Weight
TTM P/E
85.93
25.0%
Forward P/E
105.79
25.0%
Price/Sales
64.37
25.0%
Price/Book Value
85.51
25.0%
Weight Average Price
TTM P/E
Forward P/E
Price/Sales
Price/Book Value
85.40
Valuation (with Rite Aid)
Applying CVS
Weight
85.93
25.0%
112.67
25.0%
64.37
25.0%
85.51
25.0%
Weight Average Price
CVS 10K, RAD 10K and Bloomberg
$
$
87.12
RAD
40.67
46.99
0.28
18.98
WBA Stock Performance to Date
Yahoo! Finance Interactive Graph
WBA vs. CVS Comparable Performance to Date
Capitalization of Rite Aid: 8.14 B (.1)
Capitalization of Walgreens: 89.08B (.9)
Price increased on the day of announcement: 6.6%
Price increased from Oct 26th 2015 till Nov 11th 2015: -8.2%
Yahoo! Finance Interactive Graph
Current Holding: 300 Shares trading at $81.82 (20% of portfolio); Dividend Yield of 17%; Last Paid Dividend of $0.36 on Aug 17th, 2015
Without Rite Aid
Comparable
Value of:
$85.40
DCF Value of:
86.70
Final WBA
Value of:
$86.31
With Rite Aid
Comparable
Value of:
$87.12
DCF Value of:
96.71
Final WBA
Value of:
93.83
Final Valuation
Without Rite Aid
DCF
Comps
Estimate
$
86.70
$
85.40
Target
$
86.31
15%
With Rite Aid
DCF
Comps
Estimate
$
96.71
$
87.12
Weight
70%
30%
Target
$
93.83
Final Target
$
92.70
Upside Potential
Weight
70%
30%
85%
13.30%
BUY 100 shares at market price