10H
Red Raider Analysts
A Valuation of
As of April 1, 2005
Barakha Yadav
barakha.yadav@ttu.edu
C.J. Lauzon
charles.e.lauzon@ttu.edu
Ira Freilich
irafrey@gmail.com
Andrew Armstrong
andrew.armstrong@ttu.edu
Rudy Garza
rudolph.a.garza@ttu.edu
Table of Contents
Executive Summary--------------------------------------
2
Business & Industry Analysis----------------------------
5
Company Overview----------------------------------------Five Forces Model-----------------------------------------Characterization of Industry-----------------------------Key Success Factors---------------------------------------Competitive Analysis--------------------------------------Industry Conclusion-----------------------------------------
5
5
13
14
14
15
Accounting Analysis--------------------------------------
17
17
18
20
21
22
27
28
Key Accounting Policies----------------------------------Accounting Flexibility-------------------------------------Evaluating Accounting Strategy--------------------------Quality of Disclosure---------------------------------------Screening Ratio Analysis----------------------------------Potential Red Flags----------------------------------------Undoing Accounting Distortions---------------------------
Ratio Analysis & Forecast Financials--------------------
29
Financial Ratio Analysis------------------------------------Trend (Time Series) Analysis-------------------------------Cross-sectional Benchmark Analysis----------------------Financial Statement Forecasting Methodology----------Analysis & Forecasting Conclusion------------------------Altman Z-Score Analysis-------------------------------------
29
30
40
53
55
56
Valuation Analysis------------------------------------------
57
Method of Comparables------------------------------------Estimating Weighted Average Cost of Capital----------Intrinsic Valuation Models-----------------------------------
57
60
62
Discounted Free Cash Flows-----------------------------------Discounted Dividends-------------------------------------------Residual Income-------------------------------------------------Abnormal Earnings Growth------------------------------------Long-run Average Residual Income Perpetuity--------------
63
64
65
66
68
Summary of Valuations--------------------------------------
69
References--------------------------------------------------
70
Appendices-------------------------------------------------
71
-1-
Executive Summary
Company Valued: Walgreens Co.
Investment Recommendation: Undervalued—Buying Opportunity
WAG ----- NYSE (04/13/05)
52 Week Prick Range
Revenue (2004)
Market Capitalization
$43.71
$32.40 - $46.75
$37,508,200
$44,800,000,000
Shares Outstanding
1.02 B
8.48
18.11%
11.10%
14.25%
Cost of Capital Estimates
Ke Estimated
5-year Beta
3-year Beta
2-year Beta
Published Beta
Beta
0.484
0.272
0.484
0.355
0.256
Kd
WACC(bt)
16.17%
6.03%
Altman Z-Score
6.55
2004(A)
1.44
2005E
1.4
Valuation Ratio Comparison
Trailing P/E
Forward P/E
Forward PEG
M/B
Dividend Yield
0.48%
3-month Avg Daily Trading Volume 3,095,409
Percent Institutional Ownership
61.10%
Book Value Per Share (mrg)
ROE (most recent year)
ROA (most recent year)
Est. 5 year EPS Growth Rate
EPS Forecast
FYE 8/31
EPS
Date of Valuation: April 1, 2005
2006E
1.6
2007E
1.82
Walgreens
Industry
Average
32.81
31.17
1.87
5.42
29.46
19.49
3.79
11.96
Valuation Estimates
R2
Ke
4.87%
3.26% 4.23%
12.77% 4.87%
3.81% 4.48%
4.19%
Actual Current Price (1 April 2005)
$43.71
Ratio Based Valuations
P/E Trailing
P/E Forward
PEG Forward
Dividend Yield
M/B
Ford Epic Valuation
$39.24
$41.52
$5.05
$0.47
$43.71
$57.67
Intrinsic Valuations
Discounted Dividends
Free Cash Flows
Residual Income
Abnormal Earnings Growth
Long-Run Residual Income Perpetuity
$8.58
$50.57
$57.73
$46.94
$3.47
-2-
Recommendation—Undervalued Firm
We have valued Walgreens through a variety of intrinsic valuations and have arrived at the conclusion
that Walgreens is a buying opportunity.
The drug retailing industry is a reasonably competitive industry with high entry barriers. Government
regulations pose serious industry restraints; however, supermarkets like Wal-Mart and Albertson’s
have begun introducing their own pharmacies that compete with the traditional drug retailer. With
these factors in place, the market is pretty much set without any foreseeable change. After CVS
purchased Eckerd’s in 2004, the drug retailing industry became an even smaller market leaving four
major players. The industry is characterized by emphasizing differentiation and not cost leadership,
resulting in the companies avoiding a pricing war. Despite this, the players are competing in a buyer’s
market so the players attempt to “dense up” existing markets by driving out competition from the same
locations. In addition to the practice of “densing up,” the drug retailers are constantly looking to
diversify their company resulting in a broad array of services for the consumer.
Industry Demand Drivers
The drivers of growth for this industry will be continued government legislation making it more difficult
for consumers to purchase drugs elsewhere. In addition to government involvement, strategic
alliances between employers and drug retailers will drive the industry. As companies begin to
stipulate which drug providers their employees must use, the drug retailer best able to negotiate will
grab market share. Furthermore, diversification of services provided attract more customers which
would also mean more market share thus driving the industry demand.
The drug retailing industry will continue to grow because the nation is slowly becoming obsessed with
health and pharmaceuticals in order to combat the spiraling hysteria surrounding healthy living and
good looks. However, with the buyer’s power steadily increasing, the company with the most
convenient and user-friendly interfaces will grab most of the market share.
Walgreens is well positioned
Walgreens is a leader in the industry. Their already firmly established internet and phone
prescription-filling systems are just beginning to be initiated by competitor Rite-Aid. This convenience
for the customers allows them to grab more of the market share. Plus, being a leader in the industry
allows them to “dense up” their existing markets and driving out smaller competitors.
Margin Expansion
In order to increase Walgreens gross margin, they are streamlining efficiency in order to drive costs
down and sales up. In addition, Walgreens’ high capital outlays for new services like a state-of-the-art
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photo lab are beginning to pay off. Therefore, the future presumably shows higher sales as
Walgreens continues to look for new investments to expand their business.
Marginal Financials
Overall, Walgreens’ financials are somewhat hard to navigate and should be looked with suspicion,
but upon further analysis, the numbers are simply hidden; any analyst would be able to find the
required numbers. Overall there are no potential red flags that we should be concerned about.
Overall, the ratios are constant over time, and show that Walgreens is in better condition than its
competition.
Valuation
Based on the valuation models, Walgreens’ stock price is currently undervalued. According to our
reasonable cost of equity, weighted average cost of capital, and growth estimates, we arrived at a
stock price in the range of $53.44 which is an average of the valuation models (Discounted Free Cash
Flows, Residual Income, Abnormal Earnings Growth, and Long Run Average Residual Income
Perpetuity). Discounted Dividends was excluded as an outlier. Using proper estimation techniques
that estimate its share value after the recent slums in the economy, Walgreens stock price went as
low as $30 per share and as high as $46 per share. Our forecasted earnings follow the trend of
increasing earnings over the past five years. While the stock has peaked at $46 dollars, according to
our valuations, it should continue to grow until it hits a stock price near $53.44.
Other Criteria
Walgreens has about a third institutional holdings and analyst feelings are mixed with about four large
research firms downgrading the firm to either a hold or a sell, whereas three other large research
firms have upgraded the firm to a buy.
Risks
As customers begin to move to one-stop shopping, supermarkets are posing large threats to the
traditional drug retailing market share. In addition, CVS’s purchase of Eckerd’s last year is putting the
heat on Walgreens in terms of growth. Undaunted, Walgreens has continued to maintain
expectations and large company growth which may be an overestimate due to the maturity of the
industry as a whole
-4-
Business & Industry Analysis
Company Overview
Walgreens is in the business of offering “customers the best drugstore service in
America.” They focus on the customer in everything they do from customer service to
the invitingness of the store’s outside environment. Walgreens was founded in 1901 by
Charles R. Walgreen, Sr. in Chicago, Illinois. Since then, it has continued to grow
reporting total operating revenues at 37.5 billion dollars for fiscal year 2004, ending
August 31, 2004. Walgreens continues to employ innovative retail thinking and
management to further enhance the consumer’s shopping experience.
Drug Retail Industry
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Rivalry Among Existing Firms: moderate
Threat of New Entrants: low
Threat of Substitute Products: high
Bargaining Power of Buyers: high
Bargaining Power of Suppliers: moderate
Five Forces Model
Force 1: Rivalry among Existing Firms
Industry growth:
Due to the myriad of products sold, millions of dollars of capital must be raised in order
to ascertain the goods to sell. This is an entry barrier into the drug retailing industry, so
in respect to new entrants, industry growth is low.
Other factors that might affect industry growth include drug sales over the Internet and
people buying their drugs in other countries (i.e. Canada or Mexico) to avoid the rising
health care costs in the United States. The Internet is the only domestic growing
opportunity of the drug retailing industry, and Walgreens has already taken steps to
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combat competing drugs sales of the Internet by offering a computerized system of
prescription refill services. In addition, it also allows customers to shop for goods other
than drugs online. Furthermore, the market of people purchasing their drugs in other
countries to avoid the health care costs in the United States will become stagnate
because, according to SuddenlySenior.com, by February 2005 Canadian government
may stop their drug stores from selling to American consumers. Therefore, because of
Walgreens initiative to incorporate a user-friendly e-commerce website and the pending
legislation stifling American’s abilities to buy foreign drugs, the growth of industry is low.
Concentration:
Walgreens has 4 major competitors in the drug retailing industry: CVS, Rite-Aid, and
Long’s Drug Store. Walgreens is by far the leader of the industry posing a market cap
much larger than that of its nearest competitor CVS. Therefore, Walgreens is the
largest player in terms of drug retailers which means that there is a high concentration
and low competition. One must not forget, however, that Walgreens sells more than
just drugs, and with the beginning of pharmacies in supermarkets like Albertson’s and
Wal-Mart, Walgreens faces competition from a new source—not just chain retail drug
stores. In addition to drugs, these supermarkets can steal customers on other goods.
This competition from new sources leads to a lower concentration, which increases
competition. The resulting conclusion from this analysis is that concentration of
Walgreens industry is moderate, which means moderate competition.
Degree of Differentiation and Switching Costs:
Walgreens’ homepage, www.walgreens.com, says their mission statement is to “offer
customers the best drugstore service in America.” Competing based on customer
service is a differentiation Walgreens employs to avoid the competition from large
supermarkets. However, in order to do this, they sacrifice lower prices; so, if the
customer is willing to pay a premium on service, he or she will shop at Walgreens. The
differentiation Walgreens uses leads to lower competition, but in regards to the goods
they sell, cost leadership is more than likely the most profitable enterprise concluding
that competition based on this element is moderate.
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Their homepage also indicates that their strategy is to aggressively enter new markets.
Entering new markets like the recent market for digital photo labs has switching costs
associated with it. However, as Nathan Slaughter of the Motley Fool indicates in his
article, Walgreens Seeing Green, Walgreens is “beginning to reap the rewards from the
substantial costs associated” with Walgreens’ push to new markets. By its very
strategy, Walgreens has large switching costs to employ new facets of the retail
industry. High switching costs of the company lead to higher competition because it
forces the company to compete instead of abandoning ship.
Scale/Learning Economies:
One of the advantages Walgreens has in comparison to its competitors is its scale of
economies. Their strategy illustrates this as they try to “dense up” existing markets.
This allows them to offer a lower price than their chain drug store competitors. In fact,
in fiscal year 2004, Walgreens.com indicated that they had opened 436 new stores.
However, its competitor CVS, with its acquisition of Eckerd’s last year, has more stores,
so in this context, competition is high amongst existing rivals because they are all trying
grow and employ a large scale of economies. There really is not any scale of learning
for the retail industry, and new innovations are soon copied by competitors.
Fixed-Variable costs:
Walgreens has fixed costs of warehousing, stores, and trucking costs. In order to pay
off these fixed costs, Walgreens stores are usually stocked with its goods. They utilize
the space in their stores for customers, so in this context most costs to Walgreens are
variable relating to the amount of goods purchased by the consumer. However, since
variable costs are more than their fixed costs, Walgreens is not compelled to lower
prices in order to induce maximum inventory turnover which equates to lower
competition.
-7-
Excess Capacity and Exit Barriers:
Since consumers can purchase goods at Walgreens just as easily as they can at its
competitors, supply exceeds demand. One would expect Walgreens to cut its prices in
order to get more customers, but since Walgreens views itself as a differential leader
and not a cost leader, they do not. This means that competition in the market is high,
but Walgreens does not conform to the market, which decreases competition.
Therefore, competition is moderate.
One must also examine the exit barriers of the drug retail industry. Government passes
legislation about who can sell prescriptions, so exit barriers are high, which leads to
higher competition. However, contrary to drugs, the other goods Walgreens sells are
not highly specialized or legislated so exit barriers are low, which causes lower
competition. Therefore, excess capacity and exit barriers lead to moderate competition
in the retail drug industry.
Force 2: Threat of New Entrants
Economies of scale: High
The amount of investment necessary for a pharmacy would be very high for a new
entrant. In addition to the aforementioned economies of scale in terms of the industry,
an individual drug store must have a pharmacist who is certified because government
does not allow the distribution of prescription drugs without a certified pharmacist. The
pharmacist must know everything about all of the medicines sold. The pharmacist must
be able to counsel the customer about the drug and be able to answer any questions
that the customer might have. This requires a high economy of scale because the
company must have the means to make sure they employ a well qualified pharmacist
who will be able to help customers as needed and make everyone feel safe and worryfree about having to take drugs. This idea reflects Sold on Seniors, Inc. recent market
study that found “until seniors feel they can trust you, they will not buy from you at any
price.” Also, pharmacists should be paid well so they do not leave the company, and the
company should compete to get the best qualified pharmacist. Besides the pharmacist,
it is also really expensive to stock a pharmacy and have the proper software to do it.
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Drugs are expensive and in order to attract more customers, a pharmacy must carry the
best variety of drugs.
In terms of the rest of the items that Walgreens sells, the economies of scale are
relatively low. Nonprescription drugs and general merchandise are items that almost
anyone can sell easily. The pharmacy part of the store is what makes this business
more expensive.
First mover advantage: Moderate
Walgreens has been around for 104 years. They have been around longer than any of
their competitors. For this reason, Walgreens is able to be the first one to do a lot of
things. Since Walgreens has been around so long, they know the trade and know
where to look for the best suppliers for nonprescription drugs and general merchandise.
Since the bargaining power of prescription drug suppliers is high, Walgreens does not
have a first mover advantage with regards to prescription drugs. Walgreens also
continues to explore and implement online means so customers can get what they need
more conveniently. Walgreens has been around long enough to start doing things
online with the implication of Intercom Plus, their interactive, advanced technology that
“serves customers' needs better than any other pharmacy resource.”
Access to Channels of Distribution and Relationships: Moderate
Building relationships and networks with different distribution channels is always difficult
at first. One channel that Walgreens has taken advantage of is television. Walgreens
hosts a “Walgreens Health Corner,” which is a half-hour TV segment on WGN that
teaches people about healthy living. Since Walgreens has a good relationship with
WGN, it would be hard for any other company to build a relationship to start a TV show
on that network. This TV show benefits all the people who strongly care about healthy
living. At this time and age there is a huge population that is adamant about health.
Walgreens’ TV show serves as a great advertising tool that sets it apart from its
competitors. However, other distribution channels exist besides television and are
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easily accessed by Walgreens’ competitors which devalues the channel and
relationship because it can be accessed by any company.
Legal Barriers: High
Drug retail is a type of medical service that merits specific licenses which are
necessary. This is a type of legal barrier for new entrants. Pharmacists themselves
have many regulations and rules that they must follow to safely distribute drugs. This
also serves as a legal barrier.
Force 3: Threat of Substitute Products
The threat of substitute products to Walgreens is not the outstanding threat. Walgreens’
threat of another product entering the market and substituting an existing product is
scarce. The real threat and primary concern of substitution for Walgreens is of
companies that provide the same services and apply the same functions.
Walgreens is in the business of convenience. They are the primary player in the market
of pharmacy/one-stop shopping. Walgreens’ customers rely on a store that can be as
efficient as possible, and a place that can provide all the products they need so that
they can avoid the aggravation of going from place to place to fill their order.
At Walgreens, a customer can drop off a prescription and do their grocery shopping
while they wait. Walgreens’ line of products is wide enough to service just about every
need and want of the average consumer. For example, customers can develop their
film and buy tobacco products all in the same facility.
Walgreens’ ability to service many different product markets make them vulnerable to
substitution. Customers that wish to fill their prescriptions can have this service
performed by countless numbers of pharmacies in the market area. Grocery shoppers
can simply purchase their food items at the local supermarket. Tobacco users can
simply make a right turn into any gas station to fulfill their needs. Women can find their
favorite cosmetics at the mall.
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CVS, Rite-Aid, and Long’s are not the only threat of substitution to Walgreens.
Walgreens is susceptible to replacement by photo labs, cosmetic stores, supermarkets,
hardware stores, and convenient stores just to name a few. It is imperative for
Walgreens to provide stellar performance to service those customers that are willing to
substitute so they will shop at Walgreens.
Force 4: Bargaining Power of Buyers
Walgreens is the largest national retail pharmacy chain and is considered the leader in
innovative drugstore retailing. The bargaining power of buyers is determined by two
factors: price sensitivity and relative bargaining power. Walgreens has several distinct
divisions within a store that include a pharmacy, nonprescription drugs, and general
merchandise. Because these products and services are undifferentiated for the most
part, consumers are more sensitive to an increase in price. To combat this price
sensitivity, every aspect of Walgreens’ competitive strategy is focused on convenience,
technical innovation, and customer service, which has allowed the company to achieve
financial success while improving the level of service. Since Walgreens holds a large
percentage of the industry market share, they are able to help set the rules of
competition but must be conscious of the consumers’ superior bargaining power due to
the number of competitors. Ultimately, Walgreens has chosen to compete in the
industry through innovative retail thinking, services, and technology giving the consumer
the bargaining power.
Force 5: Bargaining Power of Suppliers
Walgreens Company divides its sales into three distinct divisions: prescription drugs,
nonprescription drugs, and general merchandise. The general merchandise division is
all the food, drink, seasonal, and cosmetic items that Walgreens carries. Not addressed
here is income based on non-selling revenue like the photo lab.
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Prescription drugs:
Power of Suppliers: High
The bargaining power of prescription drug manufacturers is high because of the fact
that only one drug manufacturer can make their drug. Because of this fact, almost
every prescription drug on the market has only one supplier that supplies all the
pharmacies in the country. This means that the drug manufacturer can set the terms of
sale. If Walgreens is unable to negotiate, the drug manufactures can sell to other
pharmacies. This would lower Walgreens’ profits as consumers will go to the pharmacy
that carries the drug they are looking to purchase.
Nonprescription drugs:
Power of Suppliers: Moderate
The bargaining power of nonprescription drug manufacturers is moderate. Walgreens
can bargain with the suppliers of such drugs as Aspirin or Ibuprofen because there are
many companies that manufacture drugs that are comparable to each other in these
categories. However, on that same note, if Walgreens removes a prominent brand from
their shelves, consumers might refuse to buy a comparable item due to brand loyalty.
Also, the manufacturers of some nonprescription drugs also manufacture specialty
prescription drugs. If Walgreens wants to remain in good standing with prescription
drug manufacturers, they might require Walgreens to carry their nonprescription drugs
as well. While Walgreens can control some aspects of their nonprescription division,
other factors reduce their power.
General Merchandise:
Power of Suppliers: Low to Moderate
The bargaining power of general merchandise suppliers is low. This is due to the fact
that there are many manufacturers of cosmetics, chairs, toys, etc… Walgreens can
decide whether to buy these products from company A or company Z. Also, general
merchandise is not Walgreens’ main business function because a growing percentage
of their sales are based on prescription drugs sales; therefore, they will not lose much
market share if they stop carrying some of these products. However, the bargaining
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power of food and drink suppliers is moderate because Walgreens can bargain with the
suppliers of Brand X chips or Brand W soda-pop. Brands such as Frito-Lay and CocaCola hold more bargaining power; however, if Walgreens stops carrying a brand such
as Pepsi, they will lose minimal market share, if any at all. Therefore, Walgreens can
successfully bargain with these suppliers because their main function as a business
entity is not to sell soda-pop or potato chips.
Characterization of Industry
Yahoo! Finance characterizes Walgreens as a drug retailer under the services sector.
However, classifying Walgreens is more difficult than simply stating it is a drug retailer.
Walgreens sales include general merchandise that one would find at any regular
grocery store. Therefore, one must include supermarket chains such as Albertson’s
and Wal-Mart as potential competitors, not only because of their general merchandise
sales rivaling Walgreens, but their every steady push into the drug retailing industry. An
example of supermarket’s push into the drug retailing industry is Wal-Mart’s recent
advent of the Neighborhood Market which is analogous in size and style to Walgreens.
Slowly growing, the Neighborhood Market is, as according to Mike Troy, “still several
years away from becoming a serious competitive threat to conventional drug stores”
which, in three fiscal years, they have only managed just over 100 store openings.
Industry competitors of Walgreens are CVS, Caremark RX, Medco Health Solutions,
Express Scripts, and Omnicare according to Yahoo! Finance. However, in comparable
layouts, CVS, Rite-Aid, and Long’s Drug Stores are Walgreen’s main competitors. This
further complicates the definition of Walgreens’ competitors. Suffice to say that
Walgreens is a chain drug retailer whose competitors are anywhere from specifically
mail order prescription drug services like Express Scripts to huge super center
conglomerates like Wal-Mart. Because of such an array of competitors, the industry is
inundated with competition.
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Key Success Factors
In retailing, success is derived by attracting customers to a company. Walgreens
attracts its customers by revealing itself as a convenient shop where people can get
everything they need without dealing with raucous crowds found at other stores.
Furthermore, Walgreens attracts customers by providing a convenient, user-friendly
interface on their phone systems and e-commerce website.
Competitive Analysis
Walgreens has three core competencies: size, distribution, and location. This coincides
with their strategy which includes “investing heavily in high-tech stores and distribution
systems which drive service up and costs down,” and “relocating” which results in
higher customer service which is their overall strategy. From this, Walgreens
differentiates itself from its competitors by having innovative distribution systems and
technologically advanced service. It has employed Intercom Plus, which is “Walgreens
advanced new pharmacy computer and workflow system.” This pioneering computer
system has helped Walgreens efficiently fill prescription orders while still boasting the
most informative customer service. In addition, in today’s health-crazed society,
Walgreens provides its customers with a “Health Corner” which gives health-conscious
consumers credible advice from certified physicians. Both of these are traits of a
company whose competitive advantage is based on differentiation.
In addition to these traits, Walgreens adds value to the customer through its trusted
brand name and its “health initiative,” which targets customer loyalty by providing
customers ways to live a healthier life. Customers “will not buy from you at any price” if
the product quality is low; therefore Walgreens uses its superior quality via brand name
so more people will be willing to purchase drugs at their store. To add unique value to
the customer, Walgreens has implemented drive-thru service for their pharmacies and
put into operation prescription refill services over the phone and online. This flexible
delivery of services is a differentiating advantage Walgreens has over its competitors,
which drives the strategy of Walgreens’ mission—customer service. Furthermore,
Walgreens employs its three core competencies to provide a product at a cost that is
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not more than the customer is willing to pay for the differentiated product. These core
competencies bring about Walgreens major key success factor—convenience.
Walgreens relies on a customer perception of a hassle-free friendly store. People will
shop at Walgreens in order to avoid the crowds at the stores of some of its competitors.
Also, Walgreens assumes that if some customers come in to buy some prescription
drugs, they might grab a couple of items off the shelves as well. It is no secret why the
pharmacy is at the back of the store; Walgreens wants its customers to make a few
impulse buys on the way to the pharmacy checkout counter. Likewise, Walgreens’
photo lab is not located at the front of the store because they hope that customers will
purchase some items after they drop their film off.
Even though Walgreens competitive advantage is based on differentiating itself from its
competitors, it utilizes some cost leadership traits in order to present a balanced front
against its competitors. For example, Walgreens uses economies of scale to reduce
costs. Walgreens is second only to CVS in the number drug retail stores as indicated
by Yahoo! Finance. Also, as stated earlier, Walgreens invests heavily to keep its
distribution systems modern so they can increase service while driving down costs.
Costs are driven down by the distribution systems efficiency. A derivative of this
efficiency is return customers based on Walgreens’ assumption that customers will shop
there again if the customers’ experience was an enjoyable one.
Industry Conclusion
Clearly, being competitive based on differentiation has its risks. For example,
Walgreens is risking lower price for higher service, which, in their eyes, is invaluable.
Walgreens has taken the necessary steps to remain competitive on its differentiation
basis.
Walgreens core competencies of size, distribution, and location are a direct reflection of
its key success factors based around convenience to give outstanding service. Their
distribution channels are so efficient that consumers will rarely see an empty shelf.
Their location is key for convenience; they do not want to make their consumers drive
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an exorbitant amount of miles to purchase what he or she need. With convenience at
the front of their minds, customer service is the apparent strategy that is easily
executed. Additionally, Walgreens is doing everything they need to perform superb
customer service in regards to its value chain and activities. This is also a resultant of
their distribution channels. There is a proficient supply and plenty of well-trained
employees to guarantee their value chain efficiency so customers are reticent about
complaints. As long as Walgreens continues to answer the call of customer service, it
will sustain a competitive advantage in the drug retail industry.
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Accounting Analysis
Key Accounting Policies
The purpose of accounting analysis is to evaluate the degree to which a firm’s
accounting captures the current and prospective financial performance of the company.
Walgreens has chosen accounting policies that coordinate with its key success factors.
Walgreens is in the retail drug industry and important factors for them include size,
distribution, location, and superior customer service. More specifically, prescription
sales and expansion are crucial and they have accounting policies that support these
issues. Some of Walgreens critical accounting policies also include a significant
amount of estimates.
In January of 2003, Walgreens adopted an EITF issue, “accounting by a customer
(including a reseller) for certain considerations received from a vendor,” which shifted
some vendor allowances from advertising to cost of sales. It increased advertising
costs and lowered cost of sales, pretax earnings, and inventory (WAG 2004 Annual
Report). This issue also deals with the closing of a location where the present value of
future lease costs is expensed when the location is closed.
Walgreens uses estimates for several things like liability for closed locations, liability for
insurance claims, vendor allowances, allowance for doubtful accounts, and cost of sales
(Walgreens 10-K). In terms of management’s judgments and estimates, it “believes that
any reasonable deviation from these judgments and estimates would not have a
material impact on the consolidated financial position or results of operations”
(Walgreens 10-K). Basically, management believes that their estimates and judgments
are very good and any differences are not significant. This could mean that Walgreens
has steady estimates every year that are very predictable.
Walgreens has a couple of goals for their short-term investments. They want to
minimize risk, maintain liquidity, and maximize after-tax yields. To do this they have
investment limits. In terms of liquidity, they have cash and highly liquid investments with
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maturities of three months or less and they use a cash management policy to control
the flows of cash.
For leases, Walgreens uses both on and off balance sheet financing which they balance
to lower cost of capital while maintaining a good level of financial risk (Walgreens 2004
Annual report). Capital leases are used for property, plant, and equipment where
straight-line depreciation is used.
As a member of the retail industry, inventory management is very important and
Walgreens keeps a close eye on their inventory. They use LIFO and also show the
differences if FIFO was used. Walgreens has point-of-scale scanning information that
helps in tracking inventory.
Accounting Flexibility
The financial statements for Walgreens are prepared according to accounting principals
generally accepted in the United States and in compliance with SEC regulations.
Management includes predictions and estimates on the financial position of the
company based on their knowledge of the firm’s activities. According to the footnotes in
the management’s discussion and analysis, (Walgreens 2004 10-K), these projections
of future results in this report constitute forward-looking information that is based on the
current market place and competitive and regulatory expectations that involve risk and
uncertainty.
An example of an accounting policy Walgreens has chosen to utilize flexibility can be
shown in valuing their inventory. In 2004 and 2003, inventories would have been
greater by 736.4 million and 729.7 million, respectively, if they had been valued on a
first-in, first-out cost or market basis instead of their LIFO basis. Also included in their
inventory are product costs and inbound freight. To depreciate property and equipment,
Walgreens uses the straight-line method over the estimated useful lives of owned
assets. Leasehold improvements and leased properties under capital leases are
amortized over the estimated physical life of the property or over the term of the lease,
- 18 -
whichever is shorter. Estimated useful lives range from 12 ½ to 39 years for land
improvements, buildings, and building improvements and 5 to 12 ½ years for
equipment.
Walgreen’s also uses accounting flexibility to make prudent judgments on their more
significant estimates, which include liabilities for closed locations, liabilities for insurance
claims, vendor allowances, allowance for doubtful accounts, and cost of sales.
Walgreens used the following accounting techniques to arrive at their estimates
(Walgreens 10-K 2004):
Liabilities for Insurance Claims: The company obtains insurance coverage for
catastrophic exposures and other insurance required by the law to be insured.
Provisions for these losses are based upon estimates for the claims incurred. The
provisions are estimated based on historical claims experience, demographic factors,
and other actual assumptions.
Liabilities for Closed Locations: The present value of future rent obligations
and other related costs (net of estimated sublease rent) to the first lease option date.
Vendor Allowances: The allowances are initially received as a result of
purchase levels, sales, or promotion of vendor’s products. The allowances are
generally recorded as a reduction of inventory and are recognized as reduction of costs
of sales when the related merchandise is sold. The allowances received for promoting
vendors’ products are offset against advertising expense and result in a reduction of
selling, occupancy, and administrative expense to the extent of advertising incurred,
with the excess treated as a reduction in inventory costs.
Allowance for Doubtful Accounts: Based on specific receivable and historic
write off percentages.
- 19 -
Cost of Sales: Derived from point-of-sale scanning information with an estimate
for shrinkage and adjusted based on periodic inventories.
Walgreens utilizes accounting policies that allow the company to provide accounting
flexibility in accordance with the SEC and show valuable information that portrays
reliable conclusions.
Evaluating Accounting Strategy
Walgreens main competitor, CVS, poses comparable data to that of Walgreens. For
starters, CVS employs “convenience for the time-starved customer” (CVS 10-K) which
differs little from Walgreens’ core competencies of size, distribution, and location to aid
customer convenience. Therefore, within the chain drug store, goals are similar, and
the means to achieve those goals are based on differentiation. This is an important
object to note, because since they all perform similarly, one can deduce that they
should use similar accounting strategies. However, if a company uses a different
accounting strategy, one should be wary of the implications that has.
After performing the financial statement ratio analysis, we found that in terms of more
aggressive or more conservative accounting strategies, neither company is too different
from the other.
If a manager held stock incentives with their company, he or she would be more likely to
use accounting discretion to boost the net income. Walgreens does have a stock-option
plan for its employees, but it is “not to be treated as an incentive” (Walgreens 10-K
2004). This post-retirement plan is contributory, but CVS sponsors a noncontributory
post-retirement plan (CVS 10-K 2004). Walgreens managers also decided in 2004 to
incorporate a decreasing rate of growth for the retirement plan. This would decrease
expenses and increase net income. CVS has a comparable net profit margin to
Walgreens, so stock incentives in the chain drug retailers do not have much impact on
the companies’ bottom lines. Also, Walgreens and CVS have comparable debt to equity
ratio which indicates that both companies finance their companies through stock
- 20 -
issuance. The five year comparison is hard to compute because both Walgreens and
CVS have aggregated numbers in their financials. Therefore, with Walgreens’ stock
incentives not impacting net income along with their high amount of stock issuance,
executives of Walgreens do not hold a disproportionate amount of stock within the
company; this is mirrored by CVS’s accounting strategies. In summary, managers in
this industry do not use accounting discretion to manage earnings because of the net
profit margins and stock incentives are comparable to each firm.
Furthermore, Last-In-First-Out (LIFO) is the inventory strategy for the chain drug retail
industry (WAG 2004 Annual report). If this is the standard for the industry, the tax
expense should be proportional to the amount of inventory held by the company, which
is illustrated by the fact that the two companies had comparable net sales/inventory
differences over the five years from 2000 to 2004.
Walgreens has not issued any policy changes that greatly influence the accounting
strategy of the firm except the change in retirement discount rate they proposed over
the next five year to 2009. In addition, in evaluating Walgreens’ quarterly reports, there
is no indication of large fourth quarter write-offs (Walgreens 10-Q 2000-2004). In fact,
net earnings are relatively the same through the quarterly reports of the five year
analysis. From this, we can infer that policy and estimates have been realistic, at least
from the numbers they disclosed, in the past.
Quality of Disclosure
The disclosure quality of a firm is a key piece in the framework of a firm’s quality of
accounting. It is the task of management to produce documents that are useful, will
constructed, accurate, and user friendly. It is important for managers to remember that
they are providing decision making templates for the use of the shareholders as well as
internal readers of the financials.
The letter to the shareholders is intended to provide management’s discussion and
analysis of results of operations and financial condition. Only crutched by a general
- 21 -
knowledge of accounting and accounting vocabulary, are the shareholders able to filter
through the paragraphs to find the information they desire of Walgreens.
Surveying the 10-K of Walgreens may raise questions about a particular item of
disclosure. Walgreens projects that within the next five years the discount rate will
decrease concurrently with an increase in medical cost. Intuitively this does not make
sense because medical costs are projected to increase in the future.
Walgreens’ method of disclosure receives an unexpected negative response due to an
absence of the straight forward financials. For example, looking through the footnotes
does not lead the reader to any documentation of estimated sales returns and
allowances. It is not merely an assumption that readers of Walgreens’ financial
statements expect the disclosure quality to be at its best. Shareholders and analysts
alike want financial statements that are easy to understand and information that is
effortless to find, something Walgreens performed poorly. Readers generally have a
considerable interest in the firm’s condition and they reserve the right of simplicity as
well as honesty.
Screening Ratio Analysis
In this section we will discuss the ratios for Walgreens as well as Walgreens’ main
competitor, CVS. The Net Sales/Unearned Revenue and Net Sales/Warranty Liabilities
ratios are not included because these ratios need numbers that are not included in the
financials for both companies. The CVS financials for 2003 are missing because
Edgarscan did not have them listed on their website. Also, according to CVS’s income
statements, pension expense and other employment expenses are included in the
SG&A expenses resulting in a zero calculation for those ratios.
- 22 -
WAG
Net Sales/Cash from Sales
Net Sales/Net Accounts
Receivable
Net Sales/Unearned Revenue
Net Sales/Warranty Liabilities
Net Sales/ Inventory
Sales/Assets
CFFO/CI
CFFO/NOA
Total Accruals/Change in Sales
Pension Expense/SG&A
Other Employment
Expenses/SG&A
CVS
Net Sales/Cash from Sales
Net Sales/Net Accounts
Receivable
Net Sales/Unearned Revenue
Net Sales/Warranty Liabilities
Net Sales/ Inventory
Sales/Assets
CFFO/OI
CFFO/NOA
Total Accruals/Change in Sales
Pension Expense/SG&A
Other Employment
Expenses/SG&A
2000
1.01
2001
1.01
2002
1.01
2003
1.00
2004
1.00
34.51
30.84
29.42
31.94
32.08
7.49
7.07
7.87
7.73
7.92
2.99
0.17
0.78
0.25
0.00
2.79
0.11
0.52
0.27
0.00
2.90
0.19
0.67
0.25
0.00
2.79
0.17
0.23
2.81
0.77
0.27
0.00
0.00
N/A
N/A
N/A
N/A
N/A
2000
1.04
2001
1.05
2002
1.04
2003
2004
1.05
24.36
N/A
N/A
5.65
23.02
N/A
N/A
5.68
23.72
N/A
N/A
6.02
19.70
N/A
N/A
6.62
2.53
0.59
0.19
0.30
0.00
2.58
0.88
0.12
0.19
0.00
2.51
1.00
0.20
0.20
0.00
2.52
0.68
0.15
0.22
0.00
N/A
N/A
N/A
- 23 -
.
N/A
Net Sales/Cash From Sales
1.06
1.05
1.04
1.03
1.02
WAG
1.01
CVS
1.00
0.99
0.98
0.97
2000
2001
2002
2003
2004
Net Sales/Cash from Sales remains steady for Walgreens and CVS. However there is a
slight declining trend in the Walgreens number. Nothing serious comes of this because
in the later trend area, the number actually increases. Walgreens’ ratio is lower than
CVS which means that Walgreens is getting more cash for their sales than CVS.
Net Sales/Net Accounts Recievable
40.00
35.00
30.00
25.00
WAG
20.00
CVS
15.00
10.00
5.00
0.00
2000
2001
2002
2003
2004
Net Sales/Net Accounts Receivable also remains steady for Walgreens and CVS. Once
again there is a slight declining trend. Coupled with the previous ratio, this means that
sales as a whole are most likely declining. Walgreens’ ratio compared to CVS is higher
which goes along with the previous ratio stating that Walgreens gets less income from
Accounts Receivable than CVS.
- 24 -
Net Sales/Inventory
9.00
8.00
7.00
6.00
5.00
WAG
4.00
CVS
3.00
2.00
1.00
0.00
2000
2001
2002
2003
2004
Net Sales/Inventory remains steady with a slight increasing trend for both Walgreens
and CVS. Walgreens has a higher ratio than CVS which means that Walgreens makes
more profit with fewer inventories than CVS. This is probably due to a higher price that
Walgreens has, or a lower cost that Walgreens gets its inventory at.
Sales/Assets
3.50
3.00
2.50
2.00
WAG
CVS
1.50
1.00
0.50
0.00
2000
2001
2002
2003
2004
Sales/Assets also remain steady for both companies. However it seems Walgreens
remains steadier while CVS seems to increase and then decrease over the five year
period. Walgreens has a higher ratio than CVS as well which means that Walgreens
makes more sales with fewer assets than CVS. This could be that more people come to
Walgreens than CVS even though Walgreens might have fewer locations in an area.
- 25 -
CFFO/OI
1.20
1.00
0.80
WAG
0.60
CVS
0.40
0.20
0.00
2000
2001
2002
2003
2004
Cash Flow from Operations/Operating Income remains steady for Walgreens for all the
ratios except for 2004. This means that this number is probably an outlier. Overall, the
ratio remains constant for Walgreens while it seems to create an “arc” over the years for
CVS. A lower CFFO/OI number means that more of the Cash Flow from Operations is
explained by Operating Income. Walgreens is better on this ratio than CVS.
CFFO/NOA
0.90
0.80
0.70
0.60
0.50
WA G
0.40
CV S
0.30
0.20
0.10
0.00
2000
2001
2002
2003
2004
Cash Flow from Operations/Net Operating Assets decreased a tremendous amount for
Walgreens, especially in the 2002-2003 years. This is interesting because is means that
- 26 -
Walgreens is using more of their operating assets to create their operating cash flow.
While not bad, this is not as good as it was in previous years.
Total Accurals /Change in Sale s
0.35
0.30
0.25
0.20
WA G
0.15
CV S
0.10
0.05
0.00
2000
2001
2002
2003
2004
Total Accruals/Change in Sales is an interesting figure. Data for this number came only
from 200 through 2002. In it, Walgreens jumps all over the place making it impossible to
make any decision on the numbers.
Pension Expense/Selling General & Administrative and Other Employment
Expenses/SG&A are interesting figures. Since CVS and Walgreens aggregated their
pension and other expenses into SG&A, these ratios were incomputable, therefore, no
graphs exist showing the comparison.
Potential Red Flags
When identifying potential red flags in Walgreens’ Financial Statements, we combed
their statements to try to find any of these red flags.
In no way did we see any red flags in the financial statements of Walgreens. There were
no changes in accounting policy that went unexplained. In fact, when there was a
change in accounting policy, it was clearly defined with a FASB pronouncement or rule.
They also have no transactions that boosted profits. When looking at the ratios, the
steady growth in sales was followed with explanations in the management discussion
- 27 -
section, and with steady growth in other accounts keeping the revenue diagnostic ratios
steady. We did not find any unusual increases in accounts receivable in relation to
sales increases, this showed that they didn’t fill up accounts receivable with fraudulent
sales that didn’t actually happen. There were no unusual increases in inventories in
relation to sales increases; this showed that they were actually selling the merchandise
that they reported selling in the sales account. There was no increasing gap between a
firm’s reported income and its cash flow from operation activities, this showed that they
did not change their accrual estimates. There was no increasing gap between a firm’s
reported income and its tax income; this showed that they did not change their tax rules
or accounting policies. There was no use of financial mechanisms to hide trouble from
the financial statements. There was no large asset write offs. There were no large fourth
quarter adjustments. There was no change in auditors. Pre 2003, Walgreens had their
financial statements audited by Deloitte and Touché as well as Arthur Anderson;
however, after the downfall of Arthur Anderson, Walgreens only uses Deloitte and
Touché. There was no related party transaction. Despite the typical red flags indicated,
it’s important to note that one red flag to be wary of is Walgreens’ aggregated financials.
Undoing these accounting distortions are time-consuming and pain-staking.
Undoing Accounting Distortions
Other than the aggregated numbers that we disaggregated to run the ratios discussed
earlier, no real accounting adjustments needed to be made for the ratio analysis.
However, since there existed a minor change in their pension expenses with a new
figured discount rate, the expense diagnostic, Pension Expense/SG&A Expense
needed to be adjusted. We took the future value of all future payments to get a present
value. After achieving the present value of the pension expense, we inputted that data
into the numerator and got the SG&A Expense off of the income statement to find the
quotient of the ratio.
- 28 -
Ratio Analysis & Forecast Financials
Profitability and growth determine the value of the firm. Analyzing Walgreens’ cash flow
provides evidence to how well Walgreens’ assets can be converted into cash and
whether operating, investing, and financing cash flows are being directed in the proper
manner. The Walgreens’ financial statement forecasting is constructed in various parts.
The financial ratio analysis will provide a trend analysis section implementing liquidity,
profitability, and capital structure ratios. Sustainable growth rate will also be calculated.
Cross sectional analysis will allow a comparison of Walgreens’ performance with its
main competitors in the industry. The financial statement forecasting methodology
section will discuss techniques for choosing a forecasting model in the forth quarter of
this year as well as reasoning for the next ten years’ forecast. The income statement,
balance sheet, operating cash flows, their respective pro formas, and a statement of
cash flows along with a statement of operating cash flows in terms of operating income
will be provided. Following these financials will be our forecasted ratios and
assumptions.
Financial Ratio Analysis
The objective of ratio and cash flow analysis is to evaluate the effectiveness of a firm’s
operating management, investment management, financial strategies, and dividend
policies. In this section, we will compare profitability, liquidity, and operating ratios for
Walgreens over several years, which will allow us to examine effectiveness of current
strategies in these areas. Another form of ratio analysis we will perform is to compare
ratios for Walgreens against the other firms in the industry. While holding industry level
factors constant, this cross sectional comparison helps to provide insight into the
relative performance of Walgreens within the drug retail industry. Conducting ratio and
cash flow analysis is important because the information will help to identify strengths,
weaknesses, and trends in Walgreens chosen financial policies. The goal of the
financial analysis is to use these financial tools to evaluate the current and past
- 29 -
performance of Walgreens to assess its performance in the market, financial flexibility,
and the firm’s liquidity.
Trend (Time Series) Analysis
The objective of Trend Analysis is to identify trends, if there are any that exist, and from
that data make reasonable forecasts from that data. Since Walgreens’ fiscal year ends
in August, we analyzed the previous five years (2000-2004), along with the 2005 10-Q
for the first quarter in order to make our forecasts.
The first trend identified was the Sales Growth Trend.
2000
Sales Growth
2001
18.88% 16.11%
2002
2003
2004
16.48% 13.33% 15.39%
As one can see, over the past five years, sales growth has been declining. One
explanation of this decline is the entrance of supermarkets into the drug retailing
industry along with the increasing performance of internet and mail-order based drug
retailers. However, one can assume that sales growth should remain somewhat
constant even if there are new entrants because the amount of prescription drugs filled
annually is only going to increase because elderly are some of Walgreens’ most
proliferate and loyal customers. Furthermore, since this is a mature industry, new
entrants are unlikely which means that sales growth should remain somewhat constant.
The only drastic change in sales growth would result from a purchase of another
company or rapid expansion which would affect Walgreens’ borrowing of money (debt)
and issuance of stock (equity).
Next, we observed the Coverage Ratios: Current Ratio and Quick Asset Ratio.
- 30 -
Coverage Analysis
2000
2001
2002
2003
2004
Current Ratio
1.54
1.46
1.75
1.86
1.90
Quick Asset Ratio
0.27
0.27
0.48
0.59
0.70
These two ratios show how well Walgreens can cover their current liabilities with current
assets that are cash or easily converted into cash. The current ratio shows how well the
company can cover their current liabilities with current assets. Most lenders prefer a
current ratio of two or greater; however, one can see that, even though Walgreens’
current ratio is increasing, it is still less than two. Therefore, capital used for growth
would most likely come from the issuance of stock because any note Walgreens was to
sign would have a large interest rate because of the current ratio being less than two.
This means that it would be cost efficient to issue stock and not borrow to fund new
projects.
Furthermore, the quick asset ratio displays how well a company can cover their current
liabilities with cash or cash equivalents. The quick ratio’s numerator is current assets
minus inventory and prepaid expenses. From the table, one can see the quick ratio’s
quotient being much less than the current ratio’s. This means that Walgreens has most
of their current assets tied up in inventory or prepaid expenses. This makes sense
since Walgreens does not operate on a just-in-time inventory method, but it does keep
warehouses in order to ensure that its stores are fully stocked. Still, their quick asset
ratio is increasing showing that they are either paying less for inventory and prepaid
expenses, becoming more efficient with inventory, getting more return on their shortterm investments, or getting more accounts receivable.
Thus, the coverage analysis is increasing, which is good, but still below two, which
means that Walgreens is not as liquid as lenders would like, forcing Walgreens to use
equity to fund their projects.
- 31 -
To see if the quick ratio is rising because of inventory efficiency, we run the Inventory
Turnover and the Days Supply of Inventory Ratio because it explains how much
inventory is tied up in current assets.
2000
2001
2002
2003
2004
5.46
5.18
5.78
5.64
5.76
66.81
70.42
63.13
64.71
63.33
Inventory Turnover
Days supply of inventory
The inventory turnover explains the correlation between sales and inventory. A low
inventory turnover means that the company is operating inefficiently because inventory
is high and sales are low. Here we can see that Walgreens’ inventory turnover is
increasing which shows that Walgreens’ holding period for inventory is longer.
The efficiency of a company in terms of inventory turnover is best exemplified by the
days supply of inventory ratio. This ratio shows how many days inventory is on the
shelf before it is sold. This ratio is decreasing over the five years, which makes sense
because as inventory turnover is increasing, therefore efficiency is increasing, which
means that inventory is leaving the shelves more quickly, and results in a smaller days
supply of inventory ratio. Therefore, from this information, we can deduce that the quick
asset ratio is increasing because Walgreens is becoming more efficient with their
inventory.
However, an increase in inventory efficiency may not be the only cause to the increase
in the coverage ratios. If the collection period is shorter, than the company is receiving
cash for goods sold more quickly which decreases their percentage of bad debt
allowance resulting in more current assets which can increase both coverage ratios.
The collection period is determined by performing the Accounts Receivable Turnover
and the Days Supply of Receivables Ratio.
Accounts Receivable Turnover
Days sales outstanding
2000
2001
2002
2003
2004
34.51
30.84
30.04
31.94
32.08
10.576
11.834
12.151
11.429
11.377
- 32 -
From the data, one can see that the accounts receivable turnover is decreasing. This
decrease in accounts receivable turnover has a negative affect on operating efficiency.
Despite this fact, it is still a reasonable number. Once again, the turnover rate is best
exemplified by seeing it in terms of days outstanding. The days supply of receivables
turnover is increasing showing that Walgreens is taking more time in collecting on their
accounts receivable (longer collection period), which is a negative affect on operations.
Since these ratios are not improving, we can deduce that the coverage ratios are more
of a function of inventory turnover efficiency and not account receivable turnover
efficiency.
All of the above ratios, minus the sales growth, have been merely a function of
analyzing Walgreens liquidity. On a larger scale, however, the company’s Working
Capital Turnover gives a big picture scope in defining the company’s liquidity.
Working Capital Turnover
2000
2001
2002
2003
2004
$17.01
$17.81
$12.97
$11.07
$10.17
Working capital turnover is computed by dividing sales by working capital (current
assets-current liabilities). Working capital measures the amount of liquid assets the
company has to build its business. Obviously, a company wants to be as liquid as
possible because a company can’t function without cash. Therefore, they want a high
working capital, which would cause the company’s working capital turnover to be
smaller. Thus, a company would prefer a smaller working capital turnover.
Walgreens’ working capital turnover is decreasing. This makes sense since we’ve
already discussed how their current assets are increasing because of inventory
turnover. Furthermore, one can also assume that as a company grows, sales must
increase which means that they have more cost of goods sold which results in a higher
inventory turnover. Therefore, since the inventory and accounts receivable turnovers
are increasing and working capital turnover is decreasing, one can see that Walgreens
- 33 -
is in a growing period. This is also shown by our analysis of the sales growth trend.
Therefore, in terms of liquidity, Walgreens is doing well and is using their liquidity to
expand their business.
Therefore, overall liquidity of Walgreens is doing well except the accounts receivable
turnover. This indicates that overall liquidity is improving and the overall operating
efficiency is improving. Walgreens can further their operating efficiency by increasing
their accounts receivable turnover.
Liquidity Analysis
2000
2001
2002
2003
2004
Increasing
Current Ratio
1.54
1.46
1.75
1.86
1.90 which is good
Increasing
Quick Asset Ratio
0.27
0.27
0.48
0.59
0.70 which is good
Increasing
Inventory Turnover
5.46
5.18
5.78
5.64
Days supply of
inventory
5.76 which is good
Decreasing
66.81
70.42
63.13
64.71
63.33 which is good
Decreasing
which is bad,
but still a
Accounts Receivable
Turnover
reasonable
34.51
30.84
30.04
Days supply of
receivables
32.08 number
Increasing
10.576 11.834 12.151 11.429 11.377 which is bad
Working Capital
Turnover
31.94
Decreasing
$17.01 $17.81 $12.97 $11.07 $10.17 which is good
However, the drug retail industry is already pretty mature, and high sales growth can’t
continue forever; hence, we must evaluate the Sustainable Growth Rate for Walgreens.
- 34 -
2000
Sustainable Growth Rate
2001
2002
2003
2004
15.16% 14.30% 14.00% 14.22% 14.38%
Yahoo! Finance estimates the sales growth rate for the next 10 years as being 15%;
however, as seen by the sustainable growth rate, that 15% is unachievable. Therefore,
from our trend analysis we can conclude that the trend is about is about 14% for the
next few years followed by 10.5% and 7%, which takes into consideration our
sustainable growth rate along with the Yahoo! Finance experts.
After we computed the liquidity of Walgreens, we had to perform analysis of profitability.
The first ratio we tackled was the Gross Profit Margin.
2000
Gross Profit Margin
2001
2002
2003
2004
27.07% 26.70% 26.52% 27.07% 27.19%
A company aims to achieve the highest profitability while incurring the least amount of
expenses. Being as such, a company will strive for a high gross profit margin because
gross profit is a function of sales minus cost of goods sold.
Walgreens has a steady gross profit margin, only increasing .12% over the course of
five years. This increase is minimal and does not affect our forecast much; therefore,
we forecasted our amounts based on a five year moving average because we think
even though change in the gross profit margin is minimal, the moving average would
help mitigate any error in picking a single number for all forecasted data.
Next, we computed the Operating Expense Ratio. This is computed by dividing
operating expense by sales.
Operating Profit Margin
2000
2001
2002
2003
2004
21.30%
21.02%
20.85%
21.38%
21.48%
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A company wants to decrease this ratio because the less operating expenses they
have, the higher net income yield will be. We see little increase in this ratio. The slight
increase has a negative affect on profitability, but since the increase is only .18%, it’s
close to negligible. In the same way we forecasted gross profit margin, we used a five
year moving average to compensate for any small change in the actual number. In
general, operating profit margin is steady at about 21.2%.
If a company has fewer operating expenses, it will have a higher net income, and, in
turn, a higher Net Profit Margin, which is net income divided by sales.
Net Profit Margin
2000
2001
2002
2003
2004
3.66%
3.60%
3.55%
3.62%
3.63%
Once again, the trend is steady—hovering around 3.6%, but over the five years, it is
decreasing, which is bad. This makes sense because if the operating expense ratio is
increasing, than the net profit margin should be decreasing. However, it’s no
coincidence that the small change in the operating expense ratio mirrors a small change
in the net profit margin. Consistently, we used a five –year moving average for the
same reasons we used it on the other two profitability ratios—to compensate for slight
changes that are bound to occur in a single number forecast.
The next ratio we computed was the Asset Turnover, which is sales divided by total
assets.
Asset Turnover
2000
2001
2002
2003
2004
2.99
2.79
2.90
2.85
2.81
A company desires an increasing asset turnover because they want to make more sales
to grow, which will decrease the amount of inventory which decreases which total
assets resulting in a higher asset turnover. Walgreens’ asset turnover has decreased
- 36 -
18% over the past five years, which is bad, but not a significant amount to overly affect
profitability. Therefore, we can deduce that it’s still a good number. Once again we
used a five-year moving average in our forecasts in order to compensate for year to
year discrepancies that might increase or decrease the ratio more than the preceding
years.
The next profitability ratio we figured was the Return on Assets ratio which is net income
divided by total assets.
Return on Assets
2000
2001
2002
2003
2004
10.93%
10.03%
10.32%
10.31%
10.19%
Walgreens return on assets is decreasing over the five year period. This is mirrored by
the decreasing asset turnover. This means that Walgreens’ asset turnover is
decreasing because of an increase in total assets; likewise, return on assets is
decreasing because Walgreens is carrying more total assets which are characteristic of
a growing company.
This decrease of .74% is bad for Walgreens. Since the trend is decreasing, we
forecasted a declining return on assets ratio based on the same five year moving
average instead of “eyeballing” a number throughout the forecast, because we believe
their return on assets will continue to decline.
Next, we computed the Return on Equity ratio which is calculated by dividing net income
by total shareholder’s equity.
Return on Equity
2000
2001
2002
2003
2004
18.34%
17.01%
16.36%
16.34%
16.53%
A company would like to have an increasing return on equity because it would show that
they are being more profitable; however, Walgreens’ ratio is declining. This is not
- 37 -
surprising because since Walgreens is continuing to expand, with a current ratio of less
than two, Walgreens has to fund expansion through stock issuance which makes the
return on equity lower. In analyzing the data, we see a decreasing ratio which is
plateauing at about16.50%. Since the trend is decreasing, we forecasted a decreasing
return on equity for the next ten year using the five year moving average. Despite its
plateau, this number is still reasonable in a post-2001 environment.
Overall, the profitability of Walgreens is poor because all, except gross profit margin, of
the profitability ratios are decreasing summarized in the following table:
Profitability Analysis
2000
2001
2002
2003
2004
Increasing
which is
Gross Profit Margin
27.07%
26.70%
26.52%
27.07%
27.19% good
Increasing
Operating Profit Margin
21.30%
21.02%
20.85%
21.38%
21.48% which is bad
Decreasing
Net Profit Margin
3.66%
3.60%
3.55%
3.62%
3.63% which is bad
Decreasing
which is
bad, but still
a good
Asset Turnover
2.99
2.79
2.90
2.85
2.81 number
Decreasing
Return on Assets
10.93%
10.03%
10.32%
10.31%
10.19% which is bad
Decreasing
which is
bad, but still
a good
Return on Equity
18.34%
17.01%
- 38 -
16.36%
16.34%
16.53% number
After we analyzed the liquidity and profitability ratios, we needed to analyze the
Walgreens capital structure which describes the long-term financing of the company.
There are three ratios we computed for this: Debt to Equity Ratio, Times Interest
Earned, and Debt Service Margin.
Capital Structure Analysis
Debt to Equity Ratio
Times Interest Earned
Debt Service Margin
2000
2001
2002
2003
2004
0.68
0.70
0.59
0.59
0.62
3060.3
N/A
451.06 N/A
0.465
0.8025
N/A
0.7181
N/A
0.6257
First, Walgreens debt to equity ratio is decreasing which is good. This means, as our
previous deductions pointed out from the liquidity analysis, that Walgreens is in fact
using more stock issuance to finance their expansion and not debt. The average debt
to equity ratio is somewhere between .5 and 1.5, which means that Walgreens capital
structure as a function of debt to equity is in very good shape.
To forecast the debt to equity ratio we used the five year moving average to counteract
any slight change, positive of negative, from the overall average because the ratio
seems to be steady.
Next, we analyzed the Times Interest Earned which is calculated by dividing operative
income by interest expense. In 2000 and 2001, Walgreens had very large numbers
indicating that interest expense is a small amount in comparison to operating income.
In 2002 through 2004, we see that Walgreens did not have an interest expense which
results in no answer for that ratio. Therefore, we forecasted no answer for the next ten
years because Walgreens has no long-term debt and it would be impossible to forecast
when they would take out a new note for financing their business. The analysis of this
ratio merely shows that Walgreens does not fund their organization through debt.
- 39 -
Last, we ran the Debt Service Margin which is the operating cash flow divided by the
current notes payable. Walgreens debt service margin is increasing, meaning that the
current pay off of notes is taking up less of their operating cash flows; this makes sense
because the company has no interest expense of this debt which indicates that their
debt is decreasing as time goes on. A decreasing debt service margin is a good thing
because it shows that the company isn’t drowning in debt and spending all of their
operating revenue just to pay off the principle of debts. Since the trend is decreasing,
with the occasional increase, we used a five-year moving average to forecast the debt
service margin for the next ten years.
Overall, Walgreens capital structure looks pretty good. It shows us that they rely more
heavily on equity to finance their expansion rather than debt, but not to a point to where
it is blown out of proportion. Knowing this trend, we forecasted a capital structure that
also looks pretty good using five-year moving averages.
Cross-sectional Benchmark Analysis
Cross-sectional coverage ratios
The coverage ratios for the drug retail industry are generally increasing. However,
when analyzing these ratios, it’s important to see that other than Rite-Aid, the current
ratios are all below two. This means that the industry is more heavily financed through
stock issuance and not by debt since lenders look for a current ratio above two. This
reflects Rite-Aid’s negative net income since they have so much debt expense (see Net
Profit Margin in the Appendixes for Rite-Aid). One can assume that as the industry hits
a current ratio of two, they will start implementing more debt borrowing to fund their
projects.
- 40 -
Current Ratio
2.50
RAD
RAD
RAD
2.00
CVS
WAG
RAD
CVS
WAG
CVS
WAG
LDG
CVS
Ind. Avg.
WAG
CVS
Ind. Avg.
Ind. Avg.
Ind. Avg.
LDG
Ind. Avg.
LDG
WAG
1.50
LDG
LDG
Ratio
RAD
1.00
WAG
CVS
RAD
LDG
Ind. Avg.
0.50
0.00
2000
2001
2002
2003
2004
Year
When one looks at the quick ratio, they can see that the drug retail industry has much of
its current assets tied up with inventory. This is shown by the vast difference in
amounts between the current ratio and the quick ratio. Save Long’s Drug Store, the
industry has a large percentage increase of the quick ratio over the five years which
means they are becoming more efficient with the inventory they have.
- 41 -
Quick Ratio
0.90
RAD
0.80
RAD
CVS
WAG
0.70
RAD
Ind. Avg.
CVS
WAG
0.60
Ratio
0.50
Ind. Avg.
RADLDG
Ind. Avg.
CVS
WAG
CVS
Ind. Avg.
LDG
CVSRAD
0.40
LDG
Ind. Avg.
LDG
0.30
WAG
LDG
WAG
CVS
RAD
LDG
Ind. Avg.
WAG
0.20
0.10
0.00
2000
2001
2002
2003
2004
Year
In general, an individual company is indicative of the industry average which shows that
each company is operating under pretty much the same circumstances. Therefore, in
terms of Walgreens, Walgreens is either the trend setter, or a trend follower. However,
there exists the possibility that the trend exists due to free market competition where the
trend is set and companies are forced to follow it.
In conclusion, the benchmark is set from the industry average. From this, Walgreens
outperformed the industry average. However, and this will be a theme throughout all
the benchmark analyses, the companies will start to move towards the industry average
because the drug retail industry is mature and will more than likely not have any
significant changes to it in the next ten years.
- 42 -
Cross-sectional Liquidity analysis
Receivables Turnover
45.00
40.00
35.00
LDG
LDG
WAG
LDG
WAG
IND. AVG
30.00
RAD
Ratio
20.00
IND. AVG
RAD
CVS
CVS
25.00
WAG
WAG
IND. AVG WAG
CVS
IND. AVG
LDG
RAD
CVS
IND. AVG
RAD
CVS
RAD
WAG
CVS
RAD
LDG
IND. AVG
15.00
10.00
5.00
0.00
2000
2001
2002
2003
2004
Year
.
Accounts receivable ratio is the ratio of the number of times that accounts
receivable amount is collected throughout the year. Walgreens ratio is above the
industry average and continues to be relatively constant over the five year graph.
This indicates that Walgreens has a high accounts receivable turnover ratio and
has strict credit policies, which reduces the amount of bad debt and the overall
collection problem. Initially LDG had a higher ratio than Walgreens but has
dropped substantially in the several years making Walgreens an industry leader in
terms of receivables turnover.
- 43 -
Inventory Turnover
9.00
LDG
8.00
LDG
LDG
LDG
7.00
RAD
LDG
IND AVG
WAG
6.00
IND AVG
WAG
IND AVG
Ratio
5.00
RAD
IND AVG
RAD
CVS
RAD
RAD
4.00
IND AVG
WAG
WAG
WAG
CVS
CVS
CVS
CVS
WAG
CVS
RAD
LDG
IND AVG
3.00
2.00
1.00
0.00
2000
2001
2002
2003
2004
Year
Managing inventory turnover is one of the most critical jobs for a business to be
financially successful. If you have too much inventory, then you will most likely have to
sell the excess at a greatly reduced price on a clearance sale. Inventory turnover rate
measures how quickly a company is moving inventory through their warehouse.
Comparing Walgreens with the industry’s competitors we found LDG consistently had
rates above Walgreens as well as the industry average. Walgreens inventory rate is
above the industry average meaning they have highly productive rate due to effective
sales of their products and are increasing their liquidity. In the last two years of our
analysis Walgreens rate was constant but a jump in their competitor’s turnover has
raised the overall industry average.
- 44 -
Working Capital Turnover
30.00
LDG
LDG
25.00
20.00
WAG
RAD
LDG
IND AVG
IND AVG
15.00
Ratio
LDG
LDG
WAG
IND AVG
WAG
CVS
CVS
10.00
IND AVG
WAG
CVS
IND AVG
RAD
CVSRAD
WAG
CVSRAD
2003
2004
WAG
CVS
RAD
LDG
IND AVG
5.00
0.00
2000
-5.00
2001
2002
RAD
-10.00
Year
Working Capital Turnover is an indication of the amount of working capital required to
support volume. The working capital ratio, which measures the ability to pay back
creditors, is calculated as current assets divided by current liabilities. In the first year of
our analysis, Walgreens, Rite-Aid, and LDG have similar working capital ratios all above
the industry average. The following year Walgreens ratio is relatively constant but their
competitors generated huge changes in their working capital. LDG had a drastic jump
due to increase in current assets and Rite-Aid suffered a severe drop well below the
industry average. In the next few years Walgreens and LDG had increases in liabilities
causing their ratios to drop slightly. Overall, Walgreens and their main competitors have
had fluctuations in their working capital ratios and in 2004 those companies have fallen
below the industry average, which could cause problems paying back their creditors.
- 45 -
Cross-Sectional Profitability Analysis:
Overall, Walgreens is more profitable or equal to the industry average when it comes to
profitability. However, due to Rite-Aid’s emphasis on debt financing, the industry
average is some what skewed in terms of return on equity.
In terms of gross profit margin, Walgreens is outperforming the industry average making
it one of the most profitable companies in the drug retail industry. Its closest competitor
is CVS which makes sense since they are the only company in the industry that rivals
Walgreens expansion rate, which has a direct relationship with the net profit margin.
Gross Profit Margin
30.00%
WAG
CVS
WAG
CVS
LDG
IND AVG
LDG
IND AVG
WAG
CVS
WAG
WAG
LDG
IND AVG
CVS
LDG
IND AVG
25.00%
RAD
RAD
RAD
CVS
IND AVG
LDG
RAD
RAD
Ratio
20.00%
WAG
CVS
RAD
LDG
IND AVG
15.00%
10.00%
5.00%
0.00%
2000
2001
2002
2003
2004
Year
Next, Walgreens tends to be operating below the industry average when it comes to the
operating expense ratio. This is a good indicator of Walgreens profitability in
comparison to the industry because they are not spending as much proportionally on
- 46 -
operating expenses as their competitors. However, as of late Walgreens has started to
be even with the industry average. This is to be expected because the drug retailing
industry is a mature industry and eventually, pending any outliers (like Rite-Aid
exuberance for debt financing), all the companies in the industry should move closer
and eventually become the average.
Operating Expense Ratio
30.00%
RAD
RAD
LDG
25.00%
LDG
IND AVG
LDG
IND AVG
WAG
Ratio
20.00%
WAG
LDG
RAD
IND AVG WAG
WAG
CVS
CVS
IND AVG WAG
CVS
CVS
LDG
RAD IND AVG
CVS
WAG
CVS
RAD
LDG
IND AVG
15.00%
10.00%
5.00%
RAD
0.00%
2000
2001
2002
2003
2004
Year
Also, the Net Profit Margin indicates that Walgreens is running above the industry
average. Even though the average is somewhat skewed by Rite-Aid’s persistent
negative net income, Walgreens still outperforms its other competitors CVS (except in
2001) and Long’s Drug Store. This shows that Walgreens has more sales than its
competitors which are also an indicator that, compared to its competitors, it could more
easily undergo expansion.
- 47 -
Net Profit Margin
6.00%
4.00%
CVS
WAG
WAG
CVS
LDG
2.00%
WAG
CVS
WAG
CVS
AVG
CVS
LDG
LDG
AVG
AVG
LDG
RAD
LDG
0.00%
2000
2001
2002
AVG
2003
2004
AVG
WAG
CVS
RAD
LDG
AVG
Ratio
-2.00%
-4.00%
RAD
-6.00%
-8.00%
RAD
-10.00%
RAD
RAD
-12.00%
Year
In Asset Turnover, Long’s generally outperforms Walgreens. Despite this, Walgreens
still outperforms the industry average. Since Long’s is a smaller company than
Walgreens, they have fewer total assets which will give the company a higher asset
turnover. Once again, in terms of asset turnover, Walgreens shows that they are more
capable of expansion than its competitors.
Asset Turnover
3.50
LDG
LDG
3.00
WAG
LDG
LDG
LDG
WAG
WAG
WAG
CVS
2.50
AVG
CVS
CVS
RAD
AVG
2.00
AVG
AVG
CVS
WAG
RAD
CVS
RAD
WAG
CVS
RAD
LDG
AVG
Ratio
RAD
1.50
1.00
RAD
0.50
0.00
2000
2001
AVG
2002
Year
- 48 -
2003
2004
Return on Assets has a skewed average because Rite-Aid shows a negative net
income. However, Walgreens still outperforms its competitors. The graph illustrates
that Walgreens is more capable of turning over its assets which result in a higher net
income. This reflects the previous deduction that Walgreens is more capable than its
competitors of expansion.
Return on Assets
15.00%
WAG
10.00%
WAG
WAG
CVS
CVS
WAG
WAG
CVS
CVS
LDG
5.00%
AVG
AVG
CVS
AVG
LDG
LDG
AVG
AVG
LDG
LDG
RAD
0.00%
Ratio
2000
2001
2002
2003
2004
RAD
-5.00%
-10.00%
RAD
RAD
-15.00%
-20.00%
RAD
-25.00%
Year
Return on Equity has a similar problem as Return on Assets because of Rite-Aid’s
outlier in 2002. However, when Rite-Aid is taken out of the industry average, it is easier
to analyze the results. Therefore, the results yield that Walgreens is more capable of
turning over its equity to complement a higher net income than its competitors.
- 49 -
WAG
CVS
RAD
LDG
AVG
Return on Equity
20.00%
WAG
18.00%
CVS
WAG
CVS
WAG
WAG
WAG
16.00%
CVS
CVS
14.00%
Ratio
12.00%
WAG
CVS
LDG
LDG
10.00%
CVS
8.00%
LDG
LDG
6.00%
LDG
4.00%
2.00%
LDG
0.00%
2000
2001
2002
2003
2004
Year
Overall, from the trend analysis, we know that Walgreens is not a very profitable
company. Knowing this, we can infer that the drug retail industry is unprofitable also
because Walgreens out performs the benchmarks in more than 95% of the profitability
analysis graphs.
- 50 -
Cross-sectional structure analysis:
Debt Service Margin
90.00
80.00
LDG
70.00
LDG
60.00
Ratio
50.00
WAG
CVS
RAD
LDG
AVG
40.00
LDG
30.00
AVG
20.00
LDG
AVG
10.00
AVG
CVS
WAG
CVS
WAG
RAD
WAG
CVSRAD
CVSRAD
WAG
2002
2003
CVSRADLDGAVG
WAG
0.00
RAD
2000
2001
-10.00
2004
AVG
Year
Debt Service Margin for Walgreens has remained below one for the past five years with
no sudden increases or decreases. While Longs’ Debt Service Margin increased in
2000 through 2002, then trails off. Walgreens has remained constant with the industry if
you disregard Longs. This means that Walgreens has not taken on excessive debt
compared to the industry, nor have they had a decrease or increase in operating cash
flows compared to the industry.
- 51 -
Times Interest Earned
35.00
CVS
30.00
CVS
25.00
CVS
20.00
LDG
Ratio
CVS
CVS
RAD
LDG
15.00
CVS
10.00
LDG
LDG
LDG
LDG
5.00
RAD
RAD
RAD
2001
2002
0.00
2000
RAD
2003
2004
RAD
-5.00
Year
Times interest earned is an interesting ratio to analyze. Walgreens has not been
following the industry norms in terms of times interest earned, thus is considered an
outlier because their times interest earned in 2000 and 2001 was enormous based on
industry comparison. From 2002 on, they had zero times interest earned which stems
from their avoidance to issue debt to fund new undertakings.
- 52 -
Debt to Equity Ratio
1.20
LDG
LDG
CVS
1.00
LDG
CVS
LDG
CVS
CVS
LDG
0.80
CVS
WAG
Ratio
WAG
WAG
WAG
0.60
WAG
CVS
LDG
WAG
0.40
0.20
0.00
2000
2001
2002
2003
2004
Year
The Debt to Equity ratio for Walgreens is low compared to the rest of the industry. While
Walgreens hovers around 0.60, CVS and Longs hover around 0.85. This means that
Walgreens has less debt than equity than the rest of the industry. We omitted Rite-Aid
and the Industry Average from this graph because Rite-Aid was such an outlier that it
ruined the integrity of the graph. The Industry Average was also skewed by Rite-Aid and
was omitted as well.
Financial Statement Forecasting Methodology
Since Walgreens’ fiscal year ends in August, its 10-K for 2004 is already published. The
10-Q for 2005 is also published. So we took the data off of the 10-Q and forecasted that
out over the next three quarters to get the forecasted data for 2005. We accomplished
this by using the data off the 10-Q and multiplying the numbers by four. We feel this is a
good representation of what the 10-K for 2005 will look like because we assume that
nothing major will happen in the next three quarters and that the numbers will grow at a
constant rate.
- 53 -
Because we have the 10-Q for 2005, we forecasted out 2005 separately from the rest of
the 10 years. For the Pro-Forma Income Statement as well as the Pro-Forma Balance
Sheet, we simply used the “Eyeball test” for the previous five year’s numbers on line
items we felt were important. This allowed us to come up with a number for each line
item that suited the general trend of each line item. Some line items were omitted on the
basis that we felt that the line item was irrelevant for our purposes. On the Pro-Forma
Cash Flow Statement we only included the “Cash Flows from Operating Activities”
section because we felt that the other sections were extraneous to the purposes of
forecasting information. We forecasted the pro-forma percentages on the Pro-Forma
Statement of Cash Flows using the average of the previous five years taken across the
next ten years. For all the Pro-Forma Statements, we took the ratio we forecasted and
kept it the same for the next ten years. We feel that changing the ratios would take
away from the accuracy of the forecasts. Our thinking on this decision was to make as
few assumptions as possible, and by changing the ratio numbers in different years
would only add assumptions on top of assumptions and distort the forecast more than
we wanted.
Once we forecasted out the ratios on the Pro-Forma Statements, we calculated the
growth rate for each of the “100%” line items, these include: Net Sales, Total Assets,
Total Liabilities, Total Stockholder’s Equity, and Net Cash from Operating Activities.
Then we once again used the “eyeball test” to determine a good average number for the
growth rate. Once we had a forecasted growth rate, we took the previous year’s “100%”
line item and multiplied it by 1 + the growth rate of the line item for the entire ten years.
Once we had forecasted out these “100%” line items, we simply multiplied these “100%”
line items by a given Pro-Forma forecasted ratio to get the forecasted number for that
line item. An example to help illustrate this point is as follows; to get Net Sales for 2006
we multiplied $39,566,400,000 by 1.14 (the forecasted growth rate + 1) to get
$45,094,296,000. To get a number such as the 2006 cost of goods sold, we multiplied
the 2006 Net Sales ($45,094,296,000) by the Pro-Forma cost of goods sold forecasted
ratio (.73) to get ($32,918,836,080). We did this type of calculations for the rest of the
financial statements to get the forecasts for all the numbers for the ten forecasted years.
- 54 -
The limitations of our forecasting methods is that while we do not change the forecasted
ratios in the ten years to keep our assumptions to a minimum, some event that might
happen in the future is not adjusted into the forecast data. Also, we are limited by the
quality of disclosure that the financial statements have presented as well as any
numbers that might not be entirely accurate. The Strengths of our forecasts are that if
no significant changes in Walgreens’ policy change or no significant external changes
occur, our forecasting data should be more accurate longer into the future than a
forecast with more assumptions. Another strength of our forecasts is that we kept our
assumptions to a minimum, this enables our forecasts to more accurately portray the
future years of Walgreens without getting too much distortion or interference in the
numbers. The weaknesses of our forecasting methods are that a lot can change in ten
years, and although we attempted to be as accurate as possible, no forecast is
completely accurate. Another weakness of our forecasts is that because we used the
“eyeball test,” it created only a human average instead of a statistical average. Of
course, even though our forecasting methods have their limitations and weaknesses,
we feel that it is as accurate as we can make it.
Analysis & Forecasting Conclusion
In conclusion, after performing all the analyses, we know that forecasting the financials
is an important tool for investing management. Also, we know that Walgreens is a
company that is expanding in a mature industry. Being as such, it takes a lot of capital
to fund Walgreens’ future ventures. We concluded that Walgreens relies almost entirely
on stock issuance to fund their expansion. Even though Walgreens is expanding, they
are a liquid company, but not very profitable. This might be an indication of a later turn
to debt financing because of their increased coverage, and because investors will frown
upon Walgreens’ profit loss.
What we have done is performed coverage, operating efficiency, profitability, and capital
market analyses in order to analyze not only Walgreens, but the industry average set
benchmark. From this we recognized that Walgreens is truly a leader in the drug-
- 55 -
retailing industry because of their ability to set trends within the industry because of their
domination in the industry.
Altman Z-Score Analysis
The Altman Z-Score is the method on which all other Debt valuations are based on.
Moody’s and S&P evaluations use variations of this Z-Score for evaluating company’s
debt ratings. However we will use the original Z-Score formula for valuating debt and
then explaining how likely the company is to go bankrupt.
The formula used for the Altman Z-Score is:
Z-Score = 1.2(Working Capital/Total Assets) + 1.4(Retained Earnings/Total Assets) +
3.3(Earnings before Interest and Taxes/Total Assets) + .6(Market Value of Equity/Book
Value of Debt) + 1.0(Sales/Total Assets)
In this formula, the higher the Z-Score is the more debt worthy the firm is. A higher ZScore makes it easier for firms to get debt at a lower discount rate. The score that we
computed for Walgreens is 6.55 (Appendix 10). A Z-Score of 3.0 or higher means that
the company has a low bankruptcy risk. Walgreens’ 6.55 rating means that it is very
unlikely for Walgreens to file for bankruptcy, and because of their Z-Score, Walgreens
would be able to borrow money at a low discount rate if they wished.
- 56 -
Valuation Analysis
Every firm uses valuations in its decision making process, and “valuation is the process
of converting a forecast into an estimate of the value of the firm or some component of
the firm.” Walgreens, of course, is no exception. In the previous section, Walgreens’
financial statements were forecasted out. These forecasted numbers to provide a basis
for valuing Walgreens.
The valuations will determine whether Walgreens’ stock price is under-valued, overvalued, or fairly-valued. These valuation methods include: method of comparables,
discount dividends, discounted free cash flows, residual income, abnormal earnings
growth, and long run average residual income perpetuity. In order to complete the last
four items listed, we will need to perform a before tax weighted average cost of capital.
The weighted average cost of capital uses estimations of the firm’s Kd and Ke, both of
which are discussed in detail in their respective sections.
Method of Comparables
The method of comparables, as the name implies, is a method of comparing a company
with its competitors. As a stand alone valuation method, the method of comparables
would not be able to accurately describe a company’s stock price over a long run basis.
When comparing the industry with Walgreens, we used six different multipliers: Trailing
Price/Earnings, Forward Price/Earnings, Price/Book, Dividend/Price, Price/Sales, and
Price Earnings Growth. The competitors we will use are: Rite-Aid, CVS/Pharmacy, and
Long’s Drug Store. Below is the data we will use on a per share basis for the multiples
calculations.
WAG
RAD
CVS
LDG
PPS
43.71
3.00
52.14
34.51
EPS
1.33
0.07
2.72
1.31
- 57 -
SPS
36.73
29.66
73.64
122.40
DPS
0.664
0.00
0.27
0.56
BPS
8.06
313.04
3.01
1.86
Trailing Price/Earnings:
Trailing P/E
WAG
RAD
CVS
LDG
32.81 (Omitted from average)
42.86 Average
29.46
19.17 WAG EPS
1.33
Share
26.34 Price
39.24
The estimated share price of $39.24 from the trailing P/E method would make
Walgreens’ stock overvalued at $43.71.
Forward Price/Earnings:
Forward P/E
WAG
31.17 (Omitted from average)
RAD
18.75 Average
19.49
WAG
CVS
16.87 EPS
1.33
Share
LDG
22.85 Price
41.52
The estimated share price of $41.52 from the forward P/E method would still make
Walgreens’ stock overvalued at $43.71. However, this estimated price is closer to the
actual price and is a better model for valuing the industry
Price/Book:
P/B
WAG
RAD
CVS
LDG
5.42 (Omitted from average)
0.01 Average
11.96
WAG
17.32 BPS
8.06
Share
18.55 Price
43.71
The estimated share price of $43.71 from the P/B method is a dead on match with the
current share price of $43.71. This would make the P/B method the most accurate
method of valuing the industry at this point in time. Rite-Aid might be considered an
- 58 -
outlier in this valuation method; however we decided to include it because in general,
rite-aid is not as powerful a firm as CVS or Longs.
Dividends/Price:
D/P
WAG
RAD
CVS
LDG
0.02 (Omitted from average)
0.00 Average
0.01
WAG
0.01 PPS
43.71
Share
0.02 Price
0.47
The estimated share price of $0.47 from the D/P method would make the current price
of $43.71 incredibly overvalued. This makes the D/P method possibly the worst method
to use for this industry based on two reasons. The first reason is due to the fact that
Rite-Aid does not pay dividends and was thereby taken out of the average as an outlier.
Secondly, no one firm in the industry pays a lot of dividends per year, which means that
dividends would not correlate very well with stock price.
Price/Sales:
P/S
WAG
RAD
CVS
LDG
1.19
0.10
0.71
0.28
(Omitted from average)
Average
0.36
WAG SPS
36.73
Share Price
$13.36
The estimated share price of $13.36 from the P/S method would make the current share
price of $43.71 overvalued. This means that the P/S method is not a good model for
finding stock price in this industry.
- 59 -
Price Earnings Growth:
P.E.G.
WAG
RAD
CVS
LDG
2.34
9.27
1.47
1.61
(Omitted from average)
Average
4.12
WAG EPS
1.33
Growth Rate
14%
Share Price
43.27
The estimated share price of $43.27 from the P.E.G. method would make the current
share price of $43.71 very slightly overvalued. The way we computed the P.E.G. ratio is
simply by growing the EPS as our earnings growth rate of 14% and then multiplying it
by the industry average P.E.G. Overall the P.E.G. is a good proxy for share price.
Estimating Weighted Average Cost of Capital
Estimating the weighted average cost of capital (WACC) required us to find five things.
The cost of debt (Kd), the cost of equity (Ke), the market value of debt (Vd), the market
value of equity (Ve) and the market value of the firm (Vf). In order to find Vd, Ve, and Vf;
we need to first find Ke and Kd. The following formula describes WACC.
WACC = Vf = Vd + Ve
Vd = ( Book Value of Debt / Book Value of Debt and Equity) * Kd
Ve = ( Book Value of Equity / Book Value of Debt and Equity) * Ke
Estimating Ke:
In order to estimate Ke, we needed to find the monthly closing stock prices and
dividends from Walgreens and the S&P 500 index for five years. We did three different
estimations of Ke; a two year estimation, a three year estimation, as well as a five year
estimation. These calculations are shown in Appendix 11.
- 60 -
We decided to use the three year Ke estimation, because it explained the most variation
in stock prices. Using the three year Ke estimation is also a wise choice because we
remove any unusual variations in stock prices due to the events of September 11, 2001
as well as the “Tech Bubble Burst.” Below is our valuation of Ke.
Ke = 0.03417 + 0.4844371(0.03) = 4.87%
We used .03417 for our risk free rate because that is the average of the annual risk free
rate for the three year period we accounted for. Our market risk premium is .03 because
in the textbook is states that in recent times for most industries, the market risk premium
was somewhere between 3% and 4%, 3% fit better with our Ke.
Estimating Kd:
In order to estimate Kd, we needed to find the interest rates for Walgreens’ debt
structure and then weight it out as of total debt structure to get a weighted average cost
of debt. However, Walgreens is not a debt heavy firm. The two interest rates we used
were buried in the footnotes of the financial statements. The following is the debt
structure of Walgreens.
Weighted
Total
Weight
Rate
Rate
Other Long Term
Liabilities
708,600,000 100.00%
6.5
6.5
Total
Total Debt Structure
708,600,000
6.5 WAKd
As one can see, Walgreens has very little debt. The debt they do carry around is the
retirement plan expenses. The bulk of their operational borrowings are in short term
borrowings that do not carry an interest rate, or carry an interest rate too small to report.
- 61 -
Estimating WACC:
The formula for estimating WACC was stated at the beginning of the section. Now that
we have the required Kd and Ke, we can begin to estimate WACC. We will need two
numbers from the financials of Walgreens, their market value of debt and their market
value of equity (seen below.)
MVd: 5,114,100,000
MVe: 44,632,281,000
To calculate their market value cost of debt and equity, one must simply add together
their market value of debt and their market value of equity.
5,115,100,000 + 44,632,281,000 = 49,746,381,000 = BVf
Once one has the market value of debt, market value of equity, and market value of
debt and equity, Kd, and Ke, he can calculate the before tax WACC.
WACC = (5,114,100,000/49,746,381,000)(6.5) +
(44,632,281,000/49,746,381,000)(4.87) = 5.04%
Our before tax WACC is 5.04%. This does not seem wrong to us because we feel that
we completed the necessary steps to get to the WACC correctly. 5.04% appears to be
reasonable to use in this industry because it is not overly high nor is it un-necessarily
low. However, the true test of our WACC will come in our next valuation method, the
discounted free cash flows method.
Intrinsic Valuation Models
For our valuation models, (discounted dividends, discounted free cash flows, residual
income, and abnormal earnings growth) we will use both our WACC as well as our
- 62 -
estimated Ke. For the last year forecasted, a terminal value taken to infinity as perpetuity
will be used instead of the normal method of discounting each year individually. For
perpetuity, we will need to use a growth rate. The growth rate we will use is 0% because
we feel that Walgreens’ industry is not growing at a rate that would significantly increase
stock prices.
When looking at each of the methods below, you will notice a sensitivity analysis chart.
This is a chart of different discount rates and growth rates. (Note: In the Appendices you
will observe two different Sensitivity Analysis charts as well as valued stock prices. One
chart is of the stock price as of August 31st 2004 and one chart is the stock price
brought forward to April 1st 2005 using our Ke of 4.87%. However, in the following
discussion, only the April 1st 2005 Sensitivity Analysis and valued stock price will be
discussed.)
Discounted Free Cash Flows:
The discounted free cash flows model uses the WACC estimate that was figured earlier
as the discount rate. In order to avoid double counting tax, WACC is a before tax
computation and the cash flow from operations (CFFO) and cash flow from investing
(CFFI) is after tax. This model takes the free cash flows, CFFO - CFFI, for nine
forecasted years and multiplies that by its present value factor, 1/(1+Ke)t where t is the
year forecasted, in order to get a present value figure of the forecasted cash flows.
Then, the present value (in 2013 dollars) of the perpetuity is computed. This number is
then multiplied by the present value factor of 2013, .642, to get a present value (in 2004
dollars) of the perpetuity. Next, the sum of all present value figures of the forecasted
years is added to the present value of the perpetuity in order to find the book value of
the firm. The book value of debt and preferred stock, taken from the financials, is then
subtracted from the book value of the firm to arrive at book value of equity. Since this
book value of equity is in whole dollar amounts, it must be divided by the number of
shares outstanding, 1,021,380,521, to get a per share amount which is $60.76.
- 63 -
Next, it is important to see how sensitive the share price is to changes in the WACC and
the growth.
WACC
0.0304
0.0404
0.0504
0.0604
0.0704
Sensitivity Analysis as of April 1st 2005
g
0
0.02
0.04
0.06
$108.92
$286.42
($275.65)
($78.17)
$78.81
$140.88
$6,410.11
($115.00)
$60.76
$91.23
$238.86
($228.65)
$48.77
$66.23
$117.95
$5,341.51
$40.26
$51.24
$76.67
$199.89
Here, one can see that our calculated stock price is $60.76. It is important to note that
zero growth was assumed since Walgreens is in a mature industry; however, for
sensitivity’s sake, we analyzed the per share price for growth amounts of .02, .04, and
.06. These numbers, which will appear in the rest of the valuation sensitivity analyses,
were determined by knowing mathematically that if the growth is larger than the WACC
we will get a negative per share value which can be automatically omitted from
consideration. One can also see that the closest value we get to the actual stock price
of $43.71 is with a WACC of 7.04% and a growth rate of 0%. Overall, this valuation
model shows that Walgreens is under priced by $17.05.
Discounted Dividends
The discounted dividends method uses the Ke estimate as the discount rate instead of
WACC as used previously in the discounted free cash flows method. As stated before,
the Ke we estimated for Walgreens is 4.87%. The discounted dividends method takes
the dividend stream that we forecasted out over the next ten years and discounts these
dividends back to current year prices. On the tenth year (2014) we will take the
dividends out to infinity as a perpetuity in a terminal stream, which is then discounted
back to current year prices. The full discounted dividends method is displayed in
Appendix 15, however we will be discussing our sensitivity analysis for the discounted
dividends.
- 64 -
Ke
0.0287
0.0387
0.0487
0.0587
0.0687
Sensitivity Analysis as of April 1st 2005
g
0
0.02
0.04
0.06
$15.06
$44.16
($29.75)
($9.21)
$10.82
$19.97
($252.48)
($13.28)
$8.35
$12.66
$36.86
($24.60)
$6.72
$9.15
$16.77
($210.17)
$5.58
$7.09
$10.70
$30.89
Using our Discount rate of 4.87% and our growth rate of 0%, our value of Walgreens’
stock is that the current price of $43.71 is extremely high and that the firm is severely
over-valued. If you use a 2.87% discount rate and a 2% growth rate, you calculate a
$44.16 stock price, which is closer to the actual price, however as discussed before,
there is no inclination that there will be growth in this industry that will significantly
increase stock prices.
The discounted dividends is not a good valuation model because Walgreens does not
pay as much dividends in cash as they do repurchase agreements where the dividends
are reinvested into the company as the issuance of new stock. Therefore, the dividend
cash flow is unusually low compared to what they would be paying if Walgreens paid all
dividends in cash only.
Residual Income
The residual income method also uses the Ke estimate as its discount rate. As stated
before, the discount rate for Walgreens is 4.87%. The residual income valuation
method takes the book value of equity adds net income to it and then subtracts out the
dividends paid in cash to get an ending value of equity; this number then becomes the
beginning book value of equity for the next year. “Normal” income is calculated by
multiplying the beginning book value of equity by the discount rate, and the residual
income is calculated by taking the net income and subtracting it by “normal” income.
Then the residual income is discounted back to current year prices. The tenth year’s
(2014) residual income becomes the terminal value and is taken to infinity as a
- 65 -
perpetuity, which is then discounted back to current year prices. The full calculation of
the residual income method can be found in Appendix 17, however we will be
discussing our sensitivity analysis for the residual income method.
Ke
0.0287
0.0387
0.0487
0.0587
0.0687
Sensitivity Analysis as of April 1st 2005
g
0
0.02
0.04
0.06
$95.47
$262.54
($161.82)
($43.86)
$71.02
$123.89
($1,450.10)
($68.23)
$56.17
$81.10
$220.66
($133.81)
$46.01
$59.87
$103.36
($1,191.21)
$38.53
$46.94
$67.06
$179.73
Using our Discount rate of 4.87% and our growth rate of 0%, our value of Walgreens’
stock is that the current price of $43.71 is about $13 undervalued. Using a discount rate
of 6.87% and a growth rate of 0%, we get the closest to the actual stock price; however,
a 6.87% Ke is not a reasonable number. The residual income valuation method is a
better valuation for Walgreens because it does not take into consideration only one
aspect of the company, but instead focuses on different numbers in the same area. Net
Income flows into retained earnings which will get paid out in dividends to affect the
book value of equity. This method takes into consideration the actual accounting
involved with companies and how they operate to gain a better understanding of the
stock price. We feel more confident about this valuation than discount dividends.
Abnormal Earnings Growth:
The Abnormal Earnings Growth (AEG) effectively measures the share price by seeing
what excess, if any, exists from the cumulative dividend earnings after taking out normal
income. To do this, the forecasted earnings are subtracted by forecasted dividends that
were figured in the forecasted financials. The amount found is the dividends that are
reinvested at the Ke rate of 4.87%. This reinvested dividends amount is then multiplied
by the dividends of the previous year to get the cumulative-dividend earnings. AEG is
then the excess of normal earnings subtracted from cumulative-dividend earnings.
Next, we take the present value factor of each year, 1/(1+Ke)t where t is the number of
- 66 -
years, to get the present value of AEG in 2005 dollars. We add up all these present
values of AEG to get the total present value of AEG. The terminal value that starts in
2014 has an effective AEG because investors will continue to invest until they earn their
internal rate of return (IRR); that is, when NPV is zero. Therefore, the present value of
the terminal value is zero regardless of the growth rate and the cost of equity. This zero
amount from the value of the terminal value is added to the total present value of AEG
and earnings of 2005. This value computed is the capitalized amount and must be
divided by the number of shares outstanding to find a share price. The resulting share
price with a capitalization rate of 4.87% is $65.69.
Ke
0.0287
0.0387
0.0487
0.0587
0.0687
Sensitivity Analysis as of April 1st 2005
g
0
0.02
0.04
0.06
$199.63
$452.21
($189.31)
($11.00)
$106.83
$154.99
($1,278.61)
($20.00)
$65.69
$79.65
$157.79
($40.68)
$44.07
$48.62
$62.89
($362.21)
$31.38
$23.12
$35.98
$54.12
The share price with capitalization rate of 5.87% is the closest value to the actual share
price of $43.71 with a calculated value of $44.07. Changes in the growth rate do not
affect the amount of the terminal value, because it is assumed that the terminal value
will always be zero as investors continue to invest until they reach their IRR. This
sensitivity analysis makes sense, that is the computed share price is closest to the
actual share price, because the AEG model utilizes lines items from both the income
statement and balance sheet which results in an R2 that explains a great deal of
variation caused by forecasting error. The perpetuity for AEG begins in year 2006
because the price of 2005 is equal to the earnings of 2006 divided by the cost of equity;
that is Pt-1=EPSt/Ke. So, all numbers the computed numbers are in 2005 dollars
because once the earnings of 2005 are found, one can compute a share price for 2004.
- 67 -
Long Run Average Residual Income Perpetuity
The Long Run Average Residual Income Perpetuity uses information off of the balance
sheet and income statement to calculate a market to book (P/B) ratio. This is another
method of valuation. P/B is a function in calculating share price. The following equation
was used to compute a market to book ratio:
P/B = 1 + ((ROE –Ke)/(Ke-g))
After that number was computed, it was compared to the actual P/B ratio of the
company to determine value. The ROE used is in terms of the next year or t+1 (2005).
ROE-Ke is residual income. This formula is a calculation of a perpetuity, so using
residual income in terms of t+1 and then dividing that by Ke-g is the way to find present
value. Therefore, the resulting P/B ratio is in present value (2004) or time, t. To use
this valuation method for Walgreens, the ROE for 2005 was used which is 16.92%. The
Ke that was used was the estimated Ke for Walgreens which is 4.87%. With these two
pieces of information, the growth rates that are used are constant with previously
calculated valuation models.
Ke
0.0287
0.0387
0.0487
0.0587
0.0687
Sensitivity Analysis as of August 31st 2004
g
0
0.02
0.04
0.06
$53.43
$155.43
($103.63)
($31.62)
$39.41
$71.91
($895.70)
($46.21)
$31.13
$46.59
$133.10
($86.60)
$25.69
$34.36
$61.59
($748.67)
$21.83
$27.16
$39.90
$111.26
The actual P/B ratio was 5.42 and the calculated P/B is 3.47 based on the 4.87% Ke.
The P/B ratio is simply Earnings/Book value of equity. Therefore, when considering the
sensitivity analysis, we need to understand the P/B ratio. Since the book value of equity
is to remain constant throughout the sensitivity analysis, the only variable is the
earnings. Since the computed P/B ratio is less than the actual P/B ratio, earnings must
be underestimated. This shows that earnings have been undervalued, which is parallel
- 68 -
to the rest of the intrinsic valuations (excluding Discounted Dividends). Based on the
sensitivity analysis, a growth rate of 2.0%, with the Ke remaining at 4.87%, results in the
closest value to the actual P/B ratio.
Summary of Valuations
All of the intrinsic valuations, excluding discounted dividends, reveal the same
conclusion—that Walgreens is under-valued. Since the models seem to show relatively
close numbers to the actual share price, the models appear to perform accurately.
Thus, a strength of the valuation work would have to be the forecasted numbers that
were derived in the ratio analysis because they appear to be accurate. However, this
strength is only as useful as the accounting information disclosed by Walgreens.
Recall, however, that the accounting information Walgreens provides leaves much to be
desired. Therefore, even though the models generally show an under-valued firm, an
investor would be wise to be wary of such skeptical accounting disclosure. The
limitation of the poor accounting disclosure negatively affects the company’s stock price,
which causes the main weakness encountered in all the valuation work performed.
Other information that would have been helpful in evaluating Walgreens’ performance
includes qualitative assets that are impossible to calculate. Such assets as their
innovative computer ordering system, customer’s trust in Walgreens’ image, and other
intangible things would give Walgreens a higher net income increasing the likelihood of
investors investing thus raising share price. Therefore, the valuation models performed
here seem to mitigate the fact that such intangibles are not calculated because the
models effectively say that Walgreens is under-valued. Perhaps one reason for this
under-value is that the qualitative assets are not calculated into the net income.
In conclusion, after identifying Walgreens, the industry, their accounting, and their
financials, we came up with an intrinsic valuation of $53.44 which is about $10.00 above
the actual stock price. Therefore, we conclude that Walgreens poses as an
undervalued firm with a buying opportunity.
- 69 -
References
1) Edgarscan http://edgarscan.pwcglobal.com/servlets/RunQuery?goal=wf_ratios&accession=0000104207-04000011
•
•
Notes to Financial Statements
Footnotes
2) Kaiser, Frank, “Bush presses Canada to stop RX to the U.S,”
http://www.suddenlysenior.com/canadadrugnews.html
3) “Market Statistics.” http://www.soldonseniors.com/MarketStatistics.htm
4) Palepu, Krishna G. et. al, Business Analysis and Valuation: Using Financial
Statements Third Ed. Thomson Learning: United States 2004.
5) “Refining a concept, honing a competitive edge - Wal-Mart's Neighborhood
Market - develops new store concepts - Brief Article,” Gale Group.
January 21,2002.
6) Slaughter, Nathan, “Walgreens Seeing Green,”
http://www.fool.com/News/mft/2005/mft05010312.htm?logvisit=y&source=eptyholnk403200.
7) Walgreens Website – www.walgreens.com
• Our Company http://www.walgreens.com/help/faq/faqById.jhtml?faqId=ourcompany_corpmission.xml
8) www.Finance.Yahoo.com
• “WAG Sector/Industry Membership,” http://finance.yahoo.com/q/in?s=WAG.
• “Top Retail (drug) Companies by Market Cap,” Industry, Retail (drugs).
http://finance.yahoo.com/q/in?s=wag
- 70 -
Appendices
Appendix 1 - Income Statement (In millions of dollars)
Income
Net Sales
Cost of Goods Sold
Gross Profit
Sales, General & Administrative
Total Operating Expense
Total Operating Income
Income Before Tax
Income Tax Provision
Cumulative effect of accounting
change for system development
costs
Net Income
2000
$21,206.90
$15,465.90
$5,741.00
$4,516.90
$4,516.90
$1,224.10
$1,263.00
$486.40
2001
$24,623.00
$18,048.90
$6,574.10
$5,175.80
$5,175.80
$1,398.30
$1,422.70
$537.10
2002
$28,681.10
$21,076.10
$7,605.00
$5,980.80
$5,980.80
$1,624.20
$1,637.30
$618.10
2003
$32,505.40
$23,706.20
$8,799.20
$6,950.90
$6,950.90
$1,848.30
$1,888.70
$713.00
2004
$37,508.20
$27,310.40
$10,197.80
$8,055.10
$8,055.10
$2,142.70
$2,176.30
$816.10
2005
$39,556.40
$28,912.23
$10,644.17
$8,306.84
$8,306.84
$2,337.33
$2,294.27
$862.33
2006
$45,094.30
$32,974.60
$12,119.70
$9,469.80
$9,469.80
$2,649.90
$2,615.47
$983.06
2007
$51,407.50
$37,572.81
$13,834.69
$10,795.57
$10,795.57
$3,039.12
$2,981.63
$1,120.68
2008
$58,604.55
$42,786.57
$15,817.97
$12,306.95
$12,306.95
$3,511.02
$3,399.06
$1,277.58
2009
$64,758.02
$47,289.39
$17,468.64
$13,599.19
$13,599.19
$3,869.45
$3,755.97
$1,411.72
2010
$71,557.62
$52,285.25
$19,272.37
$15,027.10
$15,027.10
$4,245.27
$4,150.34
$1,559.96
2011
$79,071.17
$57,771.43
$21,299.73
$16,604.95
$16,604.95
$4,694.79
$4,586.13
$1,723.75
2012
$84,606.15
$61,805.10
$22,801.05
$17,767.29
$17,767.29
$5,033.76
$4,907.16
$1,844.41
2013
$90,528.58
$66,124.61
$24,403.97
$19,011.00
$19,011.00
$5,392.97
$5,250.66
$1,973.52
2014
$96,865.58
$70,759.89
$26,105.69
$20,341.77
$20,341.77
$5,763.92
$5,618.20
$2,111.67
$0.00
$776.60
$0.00
$885.60
$0.00
$1,019.20
$0.00
$1,175.70
$0.00
$1,360.20
$0.00
$1,431.94
$0.00
$1,632.41
$0.00
$1,860.95
$0.00
$2,121.48
$0.00
$2,344.24
$0.00
$2,590.39
$0.00
$2,862.38
$0.00
$3,062.74
$0.00
$3,277.13
$0.00
$3,506.53
Appendix 2 - Pro Forma Income Statement
Income
Net Sales
Cost of Goods Sold
Gross Profit
Sales, General & Administrative
Total Operating Expense
Total Operating Income
Income Before Tax
Income Tax Provision
Cumulative effect of accounting change for system development costs
Net Income
2000
2001
2002
2003
2004
100.00% 100.00% 100.00% 100.00% 100.00%
72.93% 73.30% 73.48% 72.93% 72.81%
27.07% 26.70% 26.52% 27.07% 27.19%
21.30% 21.02% 20.85% 21.38% 21.48%
21.30% 21.02% 20.85% 21.38% 21.48%
5.77%
5.68%
5.66%
5.69%
5.71%
5.96%
5.78%
5.71%
5.81%
5.80%
2.29%
2.18%
2.16%
2.19%
2.18%
0.00%
0.00%
0.00%
0.00%
0.00%
3.66%
3.60%
3.55%
3.62%
3.63%
- 71 -
2005
100.00%
73.00%
27.19%
21.00%
21.00%
5.70%
5.80%
2.18%
0.00%
3.60%
2006
100.00%
73.00%
27.19%
21.00%
21.00%
5.70%
5.80%
2.18%
0.00%
3.60%
2007
100.00%
73.00%
27.19%
21.00%
21.00%
5.70%
5.80%
2.18%
0.00%
3.60%
2008
100.00%
73.00%
27.19%
21.00%
21.00%
5.70%
5.80%
2.18%
0.00%
3.60%
2009
100.00%
73.00%
27.19%
21.00%
21.00%
5.70%
5.80%
2.18%
0.00%
3.60%
2010
100.00%
73.00%
27.19%
21.00%
21.00%
5.70%
5.80%
2.18%
0.00%
3.60%
2011
100.00%
73.00%
27.19%
21.00%
21.00%
5.70%
5.80%
2.18%
0.00%
3.60%
2012
100.00%
73.00%
27.19%
21.00%
21.00%
5.70%
5.80%
2.18%
0.00%
3.60%
2013
100.00%
73.00%
27.19%
21.00%
21.00%
5.70%
5.80%
2.18%
0.00%
3.60%
2014
100.00%
73.00%
27.19%
21.00%
21.00%
5.70%
5.80%
2.18%
0.00%
3.60%
Appendix 3 - Balance Sheet
2000
Current Assets
Cash and cash equivalents
Accounts receivable, net
Inventories
Other current assets
Total Current Assets
Non-Current Assets
Property and equipment, at cost, less
accumulated depreciation and amortization Other
non-current assets
Total Non-Current Assets
Total Assets
Liabilities and Shareholders' Equity
Current Liabilities
Short term borrowings
Trade accounts payable
Accrued expenses and other liabilities
Income taxes
Total Current Liabilities
Non-Current Liabilities
Deferred income taxes
Other non-current liabilities
Total Non-Current Liabilities
Total Liabilities
Shareholders' Equity
Preferred stock, $.0625 par value;
authorized 32 million shares; none
issued
Common stock, $.078125 par value;
authorized 3.2 billion shares; issued
and outstanding 1,024,908,276 in 2003
and 2002
Paid-in capital
Retained earnings
Treasury stock at cost, 2,107,263 shares in 2004
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
2001
2002
2003
$12,800,000
$614,500,000
$2,830,800,000
$92,000,000
$3,550,100,000
$3,428,200,000
$16,900,000 $449,900,000
$798,300,000 $954,800,000
$3,482,400,000 $3,645,200,000
$96,300,000 $116,600,000
$4,393,900,000 $5,166,500,000
$4,345,300,000 $4,591,400,000
$125,400,000
$3,553,600,000
$7,103,700,000
$94,600,000 $120,900,000
$4,439,900,000 $4,712,300,000
$8,833,800,000 $9,878,800,000
$1,364,000,000
$847,700,000
$92,000,000
$2,303,700,000
$440,700,000
$1,546,800,000 $1,836,400,000
$937,500,000 $1,017,900,000
$86,600,000 $100,900,000
$3,011,600,000 $2,955,200,000
$2,077,000,000
$1,237,700,000
$105,800,000
$3,420,500,000
$101,600,000
$464,400,000
$566,000,000
$2,869,700,000
$137,000,000
$176,500,000
$478,000,000
$516,900,000
$615,000,000
$693,400,000
$3,626,600,000 $3,648,600,000
$1,017,100,000
$1,017,800,000
$4,202,700,000
$120,500,000
$6,358,100,000
$4,940,000,000
2004
2007
2008
2009
2010
2011
2012
2013
2014
$8,562,672,041
$7,135,560,035
$9,722,823,687 $11,121,534,539
$8,102,353,072 $9,267,945,449
$12,293,066,605
$10,244,222,171
$13,552,041,208
$11,293,367,674
$14,991,950,425
$12,493,292,021
$16,036,607,099
$13,363,839,249
$17,166,645,412
$14,305,537,843
$18,365,489,639
$15,304,574,699
$107,800,000
$131,300,000
$5,047,800,000 $5,577,700,000
$11,405,900,000 #############
$137,950,860
$6,345,739,552
$13,795,085,983
$158,568,001
$7,294,128,035
$15,856,800,077
$180,052,290
$205,954,343
$8,282,405,363 $9,473,899,792
$18,005,229,049 $20,595,434,331
$227,649,382
$10,471,871,553
$22,764,938,158
$250,963,726
$11,544,331,400
$25,096,372,608
$277,628,712
$12,770,920,732
$27,762,871,157
$296,974,206
$13,660,813,454
$29,697,420,553
$317,900,841
$14,623,438,684
$31,790,084,096
$340,101,660
$15,644,676,359
$34,010,165,998
$2,641,500,000
$1,370,500,000
$65,900,000
$4,077,900,000
$4,376,227,994
$4,936,773,049
$5,433,072,898
$6,186,121,721
$6,884,481,308
$7,691,545,248
$8,451,492,491
$9,000,405,685
$9,643,070,095
$10,336,956,828
$228,000,000
$327,600,000
$561,700,000
$708,600,000
$789,700,000 $1,036,200,000
$4,210,200,000 $5,114,100,000
$5,329,924,432
$6,040,987,015
$6,764,267,774
$7,811,020,258
$8,681,508,311
$9,555,474,277
$10,539,024,461
$11,265,294,905
$12,082,235,796
$12,931,456,987
$931,167,771
$7,533,993,780
$1,079,739,437
$1,236,505,740 $1,406,285,548
$8,736,073,625 $10,004,455,535 $11,378,128,524
$615,000,000
$0
$0
$0
$79,000,000
$79,600,000
$80,100,000
$80,100,000
$80,100,000
$596,700,000 $748,400,000
$4,530,900,000 $5,401,700,000
$0
$0
$5,207,200,000 $6,230,200,000
$8,833,800,000 $9,878,800,000
2006
$7,449,346,431
$6,207,788,692
$566,000,000
$367,200,000
$3,787,800,000
$0
$4,234,000,000
$7,103,700,000
2005
$1,695,500,000
$1,169,100,000
$4,738,600,000
$161,200,000
$7,764,400,000
$5,446,400,000
$697,800,000
$632,600,000
$6,417,800,000 $7,591,600,000
$0
($76,300,000)
$7,195,700,000 $8,228,000,000
$11,405,900,000 $13,342,100,000
$8,465,161,551
$13,795,085,983
$9,815,813,062
$15,856,800,077
- 72 -
$11,240,961,276 $12,784,414,072
$18,005,229,049 $20,595,434,331
$1,549,177,283
$1,709,498,816
$12,534,252,564 $13,831,399,515
$1,894,623,137
$2,027,533,821
$15,329,223,559 $16,404,591,827
$2,167,863,313
$17,539,984,987
$2,318,657,991
$18,760,051,020
$14,083,429,847
$22,764,938,158
$17,223,846,696
$27,762,871,157
$19,707,848,300
$31,790,084,096
$21,078,709,011
$34,010,165,998
$15,540,898,331
$25,096,372,608
$18,432,125,648
$29,697,420,553
Appendix 4 - Pro Forma Balance Sheet
Current Assets
Cash and cash equivalents
Accounts receivable, net
Inventories
Other current assets
Total Current Assets
Non-Current Assets
Property and equipment, at cost, less
accumulated depreciation and amortization Other non-current assets
Total Assets
Liabilities and Shareholders' Equity
Current Liabilities
Trade accounts payable
Accrued expenses and other liabilities
Income taxes
Total Current Liabilities
Non-Current Liabilities
Deferred income taxes
Other non-current liabilities
Total Non-Current Liabilities
Total Liabilities
Shareholders' Equity
Preferred stock, $.0625 par value;
authorized 32 million shares; none
issued
Common stock, $.078125 par value;
authorized 3.2 billion shares; issued
and outstanding 1,024,908,276 in 2003
and 2002
Paid-in capital
Retained earnings
Treasury stock at cost, 2,107,263 shares in 2004
Total Shareholders' Equity
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
0.18%
8.65%
39.85%
1.30%
49.98%
48.26%
0.19%
9.04%
39.42%
1.09%
49.74%
49.19%
4.55%
9.67%
36.90%
1.18%
52.30%
46.48%
8.92%
8.92%
36.85%
1.06%
55.74%
43.31%
12.71%
8.76%
35.52%
1.21%
58.19%
40.82%
8.95%
36.10%
1.15%
54.00%
45.00%
8.95%
36.10%
1.15%
54.00%
45.00%
8.95%
36.10%
1.15%
54.00%
45.00%
8.95%
36.10%
1.15%
54.00%
45.00%
8.95%
36.10%
1.15%
54.00%
45.00%
8.95%
36.10%
1.15%
54.00%
45.00%
8.95%
36.10%
1.15%
54.00%
45.00%
8.95%
36.10%
1.15%
54.00%
45.00%
8.95%
36.10%
1.15%
54.00%
45.00%
8.95%
36.10%
1.15%
54.00%
45.00%
1.77%
1.07%
100.00% 100.00%
1.22%
0.95%
0.98%
100.00% 100.00% 100.00%
47.53%
42.65%
29.54%
25.85%
3.21%
2.39%
80.28%
83.04%
0.00%
0.00%
3.54%
3.78%
16.18%
13.18%
19.72%
16.96%
100.00% 100.00%
50.33% 49.33% 51.65%
27.90% 29.40% 26.80%
2.77%
2.51%
1.29%
81.00% 81.24% 79.74%
0.00%
0.00%
0.00%
4.84%
5.42%
6.41%
14.17% 13.34% 13.86%
19.00% 18.76% 20.26%
100.00% 100.00% 100.00%
1.00%
1.00%
1.00%
1.00%
1.00%
1.00%
1.00%
1.00%
1.00%
1.00%
100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
80.00%
80.00%
80.00%
80.00%
80.00%
80.00%
80.00%
80.00%
80.00%
80.00%
20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00%
100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
13.37%
11.81%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
1.87%
1.53%
1.29%
1.11%
0.97%
1.00%
1.00%
1.00%
1.00%
1.00%
1.00%
1.00%
1.00%
1.00%
1.00%
12.01%
9.70%
7.69%
86.70% 89.19% 92.27%
0.00%
0.00%
-0.93%
100.00% 100.00% 100.00%
10.00%
89.00%
10.00%
89.00%
10.00%
89.00%
10.00%
89.00%
10.00%
89.00%
10.00%
89.00%
10.00%
89.00%
10.00%
89.00%
10.00%
89.00%
10.00%
89.00%
8.67%
11.46%
89.46%
87.01%
0.00%
0.00%
100.00% 100.00%
- 73 -
100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Appendix 5 - Statement of Cash Flows
2000
Cash Flows from Operating Activities
Net earnings
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization
Deferred income taxes
Income tax savings from employee
stock plans
Other
Changes in operating assets and
Liabilities Inventories
Trade accounts payable
Accounts receivable, net
Accrued expenses and other
liabilities
Income taxes
Other
Cash flow from operating activities
2003
2004
$776,900,000
$885,600,000 $1,019,200,000 $1,175,700,000
$1,360,200,000
$230,100,000
$21,000,000
$38,500,000
$269,200,000
$46,900,000
$67,300,000
$307,300,000
$22,900,000
$56,800,000
$346,100,000
$58,900,000
$24,400,000
$403,100,000
$72,200,000
$50,300,000
$458,213,311
$65,620,514
$77,289,819
$498,731,865
$76,078,146
$84,246,038
$488,806,083
$71,278,588
$70,280,505
$537,286,375
$84,789,522
$73,541,996
$582,298,254
$90,561,998
$86,843,729
$13,600,000
$2,100,000
-$8,600,000
$29,200,000
$30,900,000
$17,455,778
$17,116,606
$20,795,375
$29,229,505
$28,454,517
-$368,200,000
$233,700,000
-$135,400,000
$101,200,000
-$651,600,000
$182,800,000
-$177,300,000
$82,200,000
-$162,800,000
$253,800,000
-$170,600,000
$75,000,000
-$557,500,000
$294,700,000
-$56,700,000
$13,600,000
-$536,000,000
$233,700,000
-$171,600,000
$207,600,000
-$740,422,891
$351,518,797
-$227,580,361
$181,796,501
-$807,304,970
$360,334,063
-$239,480,723
$194,013,671
-$669,714,183
$359,748,441
-$207,669,376
$202,833,112
-$812,052,759
$376,779,843
-$216,494,168
$238,389,074
-$869,389,324
$409,000,184
-$260,354,584
$250,888,579
-$5,400,000
$14,300,000
$4,900,000
$17,400,000
$30,700,000
$48,300,000
$719,200,000 $1,473,800,000 $1,491,500,000
-$39,900,000
$42,200,000
$1,652,700,000
$28,600,000
$31,700,000
$971,700,000
2001
Cash Flows from Investing Activities
Additions to property and equipment (1.237.0)
Disposition of property and equipment
Net proceeds from corporate-owned life
insurance
Net cash used for investing activities
Cash Flows from Financing Activities
Proceeds from short-term borrowings
Cash dividends paid
Proceeds from employee stock plans
Other
Net cash provided by (used for)
financing activities
Changes in Cash and Cash Equivalents
Net increase (decrease) in cash and
cash equivalents
Cash and cash equivalents at beginning
of year
Cash and cash equivalents at end of
year
Interest Expense
-$934,400,000
-$795,100,000
$0
$84,500,000
-$79,510,000
$8,400,000
-$702,200,000
-$70,220,000
$0
$0
-$140,900,000
$368,100,000
-$93,440,000
$14,400,000
-$551,900,000
-$55,190,000
$0
-$440,700,000
-$147,000,000
-$152,400,000
-$939,500,000
$6,200,000
$10,200,000
$0
-$923,100,000
$0
$0
-$176,900,000
$126,100,000
-$6,500,000
$419,400,000
$111,100,000
-$12,300,000
-$488,900,000
-$67,200,000
-$2,500,000
-$222,100,000
$145,100,000
$28,900,000
-$302,100,000
$433,000,000
$567,200,000
$1,268,000,000
$68,830,000 $1,268,000,000
$1,695,500,000
-$1,119,100,000
$22,900,000
$58,800,000
$0
$43,500,000
$59,000,000
-$1,037,400,000
-$1,134,500,000
$0
-$134,600,000
$79,200,000
-$7,900,000
-$63,300,000
-$129,000,000
$4,100,000
$141,800,000
$12,800,000
$400,000
2002
$3,100,000
2005
2006
2007
$1,431,941,680 $1,632,413,515 $1,860,951,407
$3,809,248
-$6,247,393
-$4,981,331
$47,946,251
$49,217,203
$53,398,299
$1,261,780,000 $1,319,796,000 $1,439,915,200
2010
2011
2012
2013
2014
$2,121,484,604 $2,344,240,488 $2,590,385,739
2008
2009
$2,862,376,242
$3,062,742,579
$3,277,134,559
$3,506,533,978
$626,682,077
$94,611,059
$96,410,000
$667,128,862
$101,784,860
$100,592,205
$706,901,049
$107,857,203
$103,874,274
$760,947,722
$117,094,661
$112,280,150
$815,792,481
$124,900,303
$122,094,372
$27,261,086
$29,763,952
$33,079,432
$36,232,341
$37,749,205
-$955,417,599 -$1,004,521,176 -$1,047,495,775 -$1,143,972,495 -$1,225,126,239
$455,012,099
$478,728,550
$506,534,605
$542,413,352
$583,369,755
-$282,790,220
-$294,795,291
-$306,637,956
-$331,391,988
-$360,527,439
$259,830,611
$279,057,000
$300,076,747
$324,418,981
$345,002,428
-$10,599,970
-$15,133,417
-$7,455,479
$59,538,172
$61,434,037
$66,215,139
$1,433,138,240 $1,421,465,888 $1,375,219,066
-$10,716,166
$70,629,360
$1,397,906,879
-$11,884,427
$75,915,748
$1,413,529,054
-$13,764,478
$81,448,531
$1,408,251,825
-$14,492,050
$86,709,765
$1,403,274,542
-$644,082,000
-$565,418,400
-$451,602,080
-$530,884,496
-$623,017,395
-$563,000,874
-$546,784,649
-$543,057,899
-$561,349,063
-$567,441,976
$209,063,485
$209,063,485
$209,063,485
$209,063,485
$209,063,485
$209,063,485
$209,063,485
$209,063,485
$209,063,485
$209,063,485
$78,860,000
-$60,000
-$131,400,000
$78,792,000
$1,508,000
-$145,020,000
$69,330,400
$3,109,600
-$257,904,000
$60,976,480
$6,191,520
-$211,704,800
$86,611,776
$7,929,824
-$209,625,760
$74,914,131
$3,735,789
-$191,130,912
$74,124,957
$4,494,947
-$203,077,094
$73,191,549
$5,092,336
-$214,688,513
$73,963,779
$5,488,883
-$206,045,416
$76,561,238
$5,348,356
-$204,913,539
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$427,500,000
$0
$0
$0
- 74 -
Appendix 6 - Operating Cash Flows
2000
Cash Flows from Operating Activities
Net earnings
Adjustments to reconcile net earnings
to net cash provided by operating
activities
Depreciation and amortization
Deferred income taxes
Income tax savings from employee
stock plans
Other
Changes in operating assets and
liabilities
Inventories
Trade accounts payable
Accounts receivable, net
Accrued expenses and other liabilities
Income taxes
Other
Net cash provided by operating
activities
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
$776,900,000
$885,600,000 $1,019,200,000 $1,175,700,000
$1,360,200,000
$1,431,941,680
$1,632,413,515
$1,860,951,407
$2,121,484,604
$2,344,240,488
$2,590,385,739
$2,862,376,242
$3,062,742,579
$3,277,134,559
$3,506,533,978
$230,100,000
$21,000,000
$269,200,000
$46,900,000
$307,300,000
$22,900,000
$346,100,000
$58,900,000
$403,100,000
$72,200,000
$458,213,311.27
$65,620,514.13
$498,731,864.60
$76,078,145.76
$488,806,082.89
$71,278,588.39
$537,286,374.87
$84,789,522.16
$582,298,253.56
$90,561,997.51
$626,682,076.61
$94,611,058.52
$667,128,861.60
$101,784,859.68
$706,901,048.96
$107,857,203.34
$760,947,721.91
$117,094,660.89
$815,792,480.85
$124,900,302.69
$38,500,000
$13,600,000
$67,300,000
$2,100,000
$56,800,000
($8,600,000)
$24,400,000
$29,200,000
$50,300,000
$30,900,000
$77,289,818.85
$17,455,778.12
$84,246,037.70
$17,116,605.60
$70,280,504.59
$20,795,374.55
$73,541,996.40
$29,229,505.19
$86,843,728.56
$28,454,517.11
$96,410,000.14
$27,261,086.39
$100,592,204.77
$29,763,951.72
$103,874,273.76
$33,079,432.10
$112,280,150.24
$36,232,340.86
$122,094,371.68
$37,749,204.55
($368,200,000) ($651,600,000)
$233,700,000 $182,800,000
($135,400,000) ($177,300,000)
($162,800,000)
$289,600,000
($170,600,000)
($557,500,000)
$240,600,000
($56,700,000)
($536,000,000)
$233,700,000
($171,600,000)
($740,422,890.87)
$351,518,796.53
($227,580,361.39)
($807,304,970.29)
$360,334,062.92
($239,480,723.08)
($669,714,183.16)
$359,748,441.27
($207,669,376.14)
($812,052,759.08)
$376,779,842.53
($216,494,168.10)
($869,389,324.39)
$409,000,183.75
($260,354,583.74)
$75,000,000
$14,300,000
$30,700,000
$177,600,000
$4,900,000
$48,300,000
$207,600,000
($39,900,000)
$42,200,000
$181,796,500.67
$3,809,247.74
$47,946,250.82
$194,013,671.05
($6,247,392.55)
$49,217,203.10
$202,833,111.99
($4,981,331.04)
$53,398,298.95
$238,389,073.86
($10,599,970.12)
$59,538,171.75
$250,888,579.12
($15,133,417.15)
$61,434,036.74
$259,830,611.38
($7,455,479.42)
$66,215,139.00
$279,056,999.73
($10,716,166.31)
$70,629,359.70
$300,076,746.68
($11,884,427.22)
$75,915,747.76
$324,418,981.24
($13,764,477.62)
$81,448,530.52
$345,002,428.17
($14,492,049.88)
$86,709,764.90
$719,200,000 $1,473,800,000 $1,491,500,000
$1,652,700,000
$1,768,389,000.00
$1,892,176,230.00
$2,024,628,566.10
$2,166,352,565.73
$2,317,997,245.33
$2,480,257,052.50
$2,653,875,046.18
$2,839,646,299.41
$3,038,421,540.37
$3,251,111,048.19
$101,200,000
$28,600,000
$31,700,000
$971,700,000
2001
$82,200,000
($5,400,000)
$17,400,000
2002
($955,417,598.80) ($1,004,521,175.75) ($1,047,495,775.25) ($1,143,972,495.07) ($1,225,126,239.10)
$455,012,099.29
$478,728,550.05
$506,534,605.26
$542,413,352.18
$583,369,755.07
($282,790,219.85) ($294,795,291.12)
($306,637,955.84) ($331,391,988.11) ($360,527,438.92)
Appendix 7 - Pro Forma Operating Cash Flows
2000
Cash Flows from Operating Activities
Net earnings
Adjustments to reconcile net earnings
to net cash provided by operating
activities
Depreciation and amortization
Deferred income taxes
Income tax savings from employee
stock plans
Other
Changes in operating assets and
Inventories
Trade accounts payable
Accounts receivable, net
Accrued expenses and other liabilities
Income taxes
Other
Net cash provided by operating
activities
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
79.95% 123.14%
69.15%
78.83%
82.30%
86.67%
88.02%
81.00%
83.36%
84.27%
84.66%
84.26%
83.51%
84.01%
84.14%
23.68%
2.16%
37.43%
6.52%
20.85%
1.55%
23.20%
3.95%
24.39%
4.37%
25.91%
3.71%
0.00%
26.36%
4.02%
24.14%
3.52%
24.80%
3.91%
25.12%
3.91%
25.27%
3.81%
25.14%
3.84%
24.89%
3.80%
25.04%
3.85%
25.09%
3.84%
3.96%
1.40%
9.36%
0.29%
3.85%
-0.58%
1.64%
1.96%
3.04%
1.87%
4.37%
0.99%
4.45%
0.90%
3.47%
1.03%
3.39%
1.35%
3.75%
1.23%
3.89%
1.10%
3.79%
1.12%
3.66%
1.16%
3.70%
1.19%
3.76%
1.16%
-37.89% -90.60%
24.05% 25.42%
-13.93% -24.65%
-11.05%
19.65%
-11.58%
-37.38%
16.13%
-3.80%
-32.43%
14.14%
-10.38%
-41.87%
19.88%
-12.87%
-42.67%
19.04%
-12.66%
-33.08%
17.77%
-10.26%
-37.48%
17.39%
-9.99%
-37.51%
17.64%
-11.23%
-38.52%
18.35%
-11.40%
-37.85%
18.04%
-11.11%
-36.89%
17.84%
-10.80%
-37.65%
17.85%
-10.91%
-37.68%
17.94%
-11.09%
11.43%
-0.75%
2.42%
5.09%
0.97%
2.08%
11.91%
0.33%
3.24%
12.56%
-2.41%
2.55%
10.28%
0.22%
2.71%
10.25%
-0.33%
2.60%
10.02%
-0.25%
2.64%
11.00%
-0.49%
2.75%
10.82%
-0.65%
2.65%
10.48%
-0.30%
2.67%
10.52%
-0.40%
2.66%
10.57%
-0.42%
2.67%
10.68%
-0.45%
2.68%
10.61%
-0.45%
2.67%
100.00% 100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
10.41%
2.94%
3.26%
- 75 -
Appendix 8 - Percent of Operating Income
Percent of Operating income
2000
2001
2002
2003
2004
2005
2006
2006
2007
2008
2009
2010
2011
2012
2013
2014
63.47%
63.33%
62.75%
63.61%
63.48%
18.80%
1.72%
3.15%
0.00%
1.11%
0.00%
0.00%
-30.08%
19.09%
-11.06%
8.27%
0.00%
2.34%
2.59%
79.38%
19.25%
3.35%
4.81%
0.00%
0.15%
0.00%
0.00%
-46.60%
13.07%
-12.68%
5.88%
0.00%
-0.39%
1.24%
51.43%
18.92%
1.41%
3.50%
0.00%
-0.53%
0.00%
0.00%
-10.02%
15.63%
-10.50%
4.62%
0.00%
0.88%
1.89%
90.74%
18.73%
3.19%
1.32%
0.00%
1.58%
0.00%
0.00%
-30.16%
15.94%
-3.07%
0.74%
0.00%
0.27%
2.61%
80.70%
18.81%
3.37%
2.35%
0.00%
1.44%
0.00%
0.00%
-25.02%
10.91%
-8.01%
9.69%
0.00%
-1.86%
1.97%
77.13%
63.33%
0.00%
18.90%
2.61%
3.02%
0.00%
0.75%
0.00%
0.00%
-28.38%
14.93%
-9.06%
5.84%
0.00%
0.25%
2.06%
75.88%
63.30%
0.00%
18.92%
2.79%
3.00%
0.00%
0.68%
0.00%
0.00%
-28.04%
14.10%
-8.66%
5.35%
0.00%
-0.17%
1.96%
75.18%
63.29%
0.00%
18.86%
2.67%
2.64%
0.00%
0.78%
0.00%
0.00%
-24.32%
14.30%
-7.86%
5.25%
0.00%
-0.13%
2.10%
79.92%
63.40%
0.00%
18.84%
2.92%
2.47%
0.00%
1.05%
0.00%
0.00%
-27.18%
14.04%
-7.33%
5.37%
0.00%
-0.33%
2.14%
77.76%
63.36%
0.00%
18.87%
2.87%
2.70%
0.00%
0.94%
0.00%
0.00%
-26.59%
13.65%
-8.19%
6.30%
0.00%
-0.45%
2.04%
77.17%
63.34%
0.00%
18.88%
2.77%
2.76%
0.00%
0.84%
0.00%
0.00%
-26.90%
14.20%
-8.22%
5.62%
0.00%
-0.17%
2.06%
77.18%
63.34%
0.00%
18.87%
2.81%
2.71%
0.00%
0.86%
0.00%
0.00%
-26.61%
14.06%
-8.05%
5.58%
0.00%
-0.25%
2.06%
77.44%
63.35%
0.00%
18.86%
2.81%
2.66%
0.00%
0.89%
0.00%
0.00%
-26.32%
14.05%
-7.93%
5.62%
0.00%
-0.26%
2.08%
77.90%
63.36%
0.00%
18.87%
2.84%
2.66%
0.00%
0.92%
0.00%
0.00%
-26.72%
14.00%
-7.95%
5.70%
0.00%
-0.29%
2.08%
77.49%
63.35%
0.00%
18.87%
2.82%
2.70%
0.00%
0.89%
0.00%
0.00%
-26.63%
13.99%
-8.07%
5.76%
0.00%
-0.28%
2.06%
77.44%
63.35%
0.00%
18.87%
2.81%
2.70%
0.00%
0.88%
0.00%
0.00%
-26.63%
14.06%
-8.04%
5.66%
0.00%
-0.25%
2.07%
77.49%
- 76 -
Appendix 9 - Forecast Assumptions and Ratios
Ratio Analysis Section
2000
2001
2002
2003
2004
2005
2006
2007
FORECASTS
2008
2009
2010
2011
2012
2013
2014
*Mature company,
overly conservative
moving average,
Yahoo! Finance
says 15%,
sustainable growth
rate is
14.25% conservatively 14%
7.00%
Sales Growth
Sustainable Growth Rate
18.88% 16.11% 16.48% 13.33% 15.39%
15.16% 14.30% 14.00% 14.22% 14.38%
14.25%
14.00%
14.25%
14.00%
14.25%
14.00%
14.25%
10.50%
14.25%
10.50%
14.25%
10.50%
14.25%
7.00%
14.25%
7.00%
14.25%
7.00%
Liquidity Analysis
Current Ratio
Quick Asset Ratio
Inventory Turnover
Days supply of inventory
Accounts Receivable Turnover
Days supply of receivables
Working Capital Turnover
1.54
1.46
1.75
1.86
1.90
0.27
0.27
0.48
0.59
0.70
5.46
5.18
5.78
5.64
5.76
66.81
70.42
63.13
64.71
63.33
34.51
30.84
30.04
31.94
32.08
10.576 11.834 12.151 11.429 11.377
$17.01 $17.81 $12.97 $11.07 $10.17
1.702
0.463
5.566
65.680
31.883
11.473
13.808
1.734
0.501
5.587
65.454
31.357
11.653
13.166
1.790
0.547
5.668
64.460
31.460
11.616
12.237
1.798
0.562
5.645
64.727
31.744
11.510
12.090
1.786
0.555
5.646
64.730
31.705
11.526
12.295
1.762
0.526
5.623
65.010
31.630
11.556
12.719
1.774
0.538
5.634
64.876
31.579
11.572
12.501
1.782
0.546
5.643
64.761
31.624
11.556
12.368
1.780
0.545
5.638
64.821
31.656
11.544
12.395
1.777
0.542
5.637
64.840
31.639
11.551
12.456
Profitability Analysis
Gross Profit Margin
Operating Profit Margin
Net Profit Margin
Asset Turnover
Return on Assets
Return on Equity
27.07%
21.30%
3.66%
2.99
10.93%
18.34%
26.91%
21.21%
3.61%
2.87
10.36%
16.92%
26.88%
21.19%
3.60%
2.84
10.24%
16.63%
26.91%
21.22%
3.60%
2.86
10.28%
16.56%
26.99%
21.29%
3.61%
2.85
10.28%
16.59%
26.98%
21.28%
3.61%
2.84
10.27%
16.65%
26.93%
21.24%
3.61%
2.85
10.28%
16.67%
26.94%
21.24%
3.61%
2.85
10.27%
16.62%
26.95%
21.25%
3.61%
2.85
10.28%
16.62%
26.96%
21.26%
3.61%
2.85
10.28%
16.63%
26.95%
21.25%
3.61%
2.85
10.28%
16.64%
Capital Structure Analysis
Total Liabilities/Total Equity
Times Interest Earned
Debt Service Margin
Total Current Assets
Operating Cash Flow as % Op. Inc
Dividend Payout Ratio
26.70%
21.02%
3.60%
2.79
10.03%
17.01%
26.52%
20.85%
3.55%
2.90
10.32%
16.36%
27.07%
21.38%
3.62%
2.85
10.31%
16.34%
27.19%
21.48%
3.63%
2.81
10.19%
16.53%
0.68
0.70
0.59
0.59
0.62
3060.3 451.06 N/A
N/A
N/A
N/A
0.465 0.8025 0.7181 0.6257
79.38% 51.43% 90.74% 80.70% 77.13%
17.33% 15.91% 14.42% 12.96% 13.01%
0.633
N/A
0.624
N/A
0.610
N/A
0.615
N/A
0.621
N/A
0.621
N/A
0.618
N/A
0.617
N/A
0.618
N/A
0.619
N/A
0.653
0.653
0.690
0.668
0.658
0.664
0.667
0.669
0.665
0.665
75.88%
14.73%
75.18%
14.21%
79.92%
13.86%
77.76%
13.75%
77.17%
13.91%
77.18%
14.09%
77.44%
13.97%
77.90%
13.92%
77.49%
13.93%
77.44%
13.96%
Appendix 10 - Altman Z-Score
1.2(working capital/total assets)
Z-Score
=
0.331566995
1.4(Retained Earnings/Total Assets)
+
0.796594239
3.3(EBIT/Total Assets)
+
0.538280331
- 77 -
.6(Market Value of Equity/Book Value of Debt)
+
2.0844
1.0(Sales/Total Assets)
+
2.811266592
= 6.562108
Appendix 11 - Ke
2-Year
3-Year
5-Year
Yahoo!
Beta
Published
Estimates R-Squared
Beta
0.3551881
3.81%
0.256
0.4844371
12.77%
0.271566
3.26%
Average
Risk Free
Rate
0.03417
0.03417
0.03417
2-Year
3-Year
5-Year
Market
Risk
Premium
0.03
0.03
0.03
2-Year
3-Year
5-Year
2-Year
3-Year
5-Year
Estimated
Ke
4.48%
4.87%
4.23%
Appendix 12 - Kd
Other Long Term Liabilities
Total Debt Structure
Total
708,600,000
708,600,000
Weight
100.00%
100.00%
Rate
Weighted Rate
6.5
6.5
6.5 Total WAKd
Appendix 13 - WACC
WACC
=
Debt
5,114,100,000
49,746,381,000
(6.50)
PPS
43.71
hares Outstandi 1,021,100,000
Market Cap
44,632,281,000
- 78 -
+
Equity
44,632,281,000
49,746,381,000
(4.87)
=
5.04
Yahoo! Ke
4.19%
3.42%
3.42%
Appendix 14 - Method of Comparables
2004 PPS
WAG
RAD
CVS
LDG
Average
EPS
43.71
3.00
52.14
34.51
SPS
1.33
0.07
2.72
1.31
36.73
29.66
73.64
122.40
DPS
BPS
0.664
0.00
0.27
0.56
8.06
313.04
3.01
1.86
WAG
Trailing P/E Forward P/E P/B
D/P
32.81
31.17
5.42
42.86
18.75
0.01
19.17
16.87
17.32
26.34
22.85
18.55
29.46
19.49
11.96
39.24
41.52
43.71
- 79 -
P/S
P.E.G.
0.02
0.00
0.01
0.02
0.01
1.19
0.10
0.71
0.28
0.36
2.34
9.27
1.47
1.61
4.12
0.47
13.36
9.65
Trailing P/E
WAG
RAD
CVS
LDG
32.81
42.86
19.17
26.34
(Omitted from average)
Average
29.46
WAG EPS
1.33
Share Price
39.24
Forward P/E
WAG
RAD
CVS
LDG
31.17
18.75
16.87
22.85
(Omitted from average)
Average
19.49
WAG EPS
1.33
Share Price
41.52
P/B
WAG
RAD
CVS
LDG
5.42
0.01
17.32
18.55
(Omitted from average)
Average
11.96
WAG BPS
8.06
Share Price
43.71
D/P
WAG
RAD
CVS
LDG
0.02
0.00
0.01
0.02
(Omitted from average)
Average
0.01
WAG PPS
43.71
Share Price
0.47
P/S
WAG
RAD
CVS
LDG
1.19
0.10
0.71
0.28
(Omitted from average)
Average
0.36
WAG SPS
36.73
Share Price
13.36
P.E.G.
WAG
RAD
CVS
LDG
2.34
9.27
1.47
1.61
(Omitted from average)
Average
4.12
WAG EPS
1.33
Growth Rate
14%
Share Price
43.27
Appendix 15 - Discounted Dividends Valuation
Years from valuation date
Dividends
Present Value Factor
1
2004
$176,900,000
Present Value of Future Dividends
Total Present Value of Forecast Future
Dividends
Terminal Value (in 2013 dollars)
Present Value of Continuing (Terminal)
Value
Estimated Value
Shares Outstanding 2004
Estimated Value Per Share
as of April 1st 2005
Actual Price per share
Cost of Equity
Growth Rate
2005
$209,063,485
0.954
2
2006
$203,496,788
0.909
3
2007
$255,769,161
0.867
4
2008
$290,490,644
0.827
5
2009
$324,240,341
0.788
6
2010
$362,592,663
0.752
7
2011
$397,216,485
0.717
8
2012
$423,534,116
0.684
9
2013
$453,735,931
0.652
$199,354,901.31
$185,035,484.96
$221,765,699.59
$240,174,600.71
$255,629,345.13
$272,590,931.64
$284,753,052.25
$289,519,789.80
$295,761,581.64
$2,244,585,387.03
$9,991,137,371.66
$6,512,586,704.05
$8,757,172,091.08
1,021,100,000
8.58
8.37
$43.71
0.0487
0
Ke
Ke
0.0687
0.0587
0.0487
0.0387
0.0287
Sensitivity Analysis as of August 31st 2004
g
0
0.02
0.04
0.06
$5.80
$7.37
$11.12
32.11
$6.95
$9.46
$17.34
($217.28)
$8.58
$13.02
$37.90
($25.29)
$11.06
$20.42
($258.13)
($13.58)
$15.31
$44.90
($30.25)
($9.36)
0.0687
0.0587
0.0487
0.0387
0.0287
Sensitivity Analysis as of April 1st 2005
g
0
0.02
0.04
0.06
$5.58
$7.09
$10.70
$30.89
$6.72
$9.15
$16.77
($210.17)
$8.35
$12.66
$36.86
($24.60)
$10.82
$19.97
($252.48)
($13.28)
$15.06
$44.16
($29.75)
($9.21)
- 80 -
Terminal
$486,568,390
Appendix 16 - Discounted Free Cash Flows Valuation
Cash Flow From Operations
Cash Flow From Investing
Free Cash Flows
2004
$1,652,700,000
-923,100,000
$2,575,800,000
0.952
$2,296,716,489
Present Value Factor
Present Value of Free Cash Flows
Total Present Value of Annual Cash
Flows
Terminal Value (in 2013 dollars)
Present Value of Terminal Cash
Flows
Value of the Firm
Book Value of Debt and Preferred
Stock
Value of Equity
Shares Outstanding 2004
Estimated Value per Share
as of April 1st 2005
Wacc
Growth (g)
1
2005
$1,768,389,000.00
-644,082,000
$2,412,471,000
2
3
4
5
6
7
8
9
2006
2007
2008
2009
2010
2011
2012
2013 Terminal
$1,892,176,230.00 $2,024,628,566.10 $2,166,352,565.73 $2,317,997,245.33 $2,480,257,052.50 $2,653,875,046.18 $2,839,646,299.41 $3,038,421,540.37 $3,251,111,048.19
-565,418,400
-451,602,080
-530,884,496
-623,017,395
-563,000,874
-546,784,649
-543,057,899
-561,349,063
-567,441,976
$2,457,594,630
$2,476,230,646
$2,697,237,062
$2,941,014,641
$3,043,257,927
$3,200,659,695
$3,382,704,198
$3,599,770,603
$3,818,553,024
0.906
$2,227,413,375
0.821
$2,215,645,454
0.782
$2,299,977,678
0.745
$2,265,742,147
0.709
$2,268,592,591
$20,305,791,270
$75,764,940,957
$48,671,627,814
$68,977,419,085
$5,114,100,000
$63,863,319,085
1,021,380,521
$62.53
61.00796773
5.04%
0
WACC
Actual Share Price
0.863
$2,136,618,355
$43.71
WACC
0.0304
0.0404
0.0504
0.0604
0.0704
0.0304
0.0404
0.0504
0.0604
0.0704
Sensitivity Analysis as of August 31st 2004
g
0
0.02
0.04
0.06
110.84
291.47
(280.51)
(79.55)
80.65
144.17
6,559.93
(117.69)
62.53
93.88
245.81
(235.30)
50.47
68.54
122.06
5,527.41
41.89
53.31
79.77
207.98
Sensitivity Analysis as of April 1st 2005
g
0
0.02
0.04
$108.92
$286.42
($275.65)
$78.81
$140.88
$6,410.11
$60.76
$91.23
$238.86
$48.77
$66.23
$117.95
$40.26
$51.24
$76.67
- 81 -
0.06
($78.17)
($115.00)
($228.65)
$5,341.51
$199.89
0.675
$2,282,581,630
0.642
$2,312,503,551
Appendix 17 - Residual Income Valuation
Beginning Book Value of Equity
Net Income
Dividends
Ending Book Value of Equity
"Normal" Income
Residual Income (RI)
2004
$8,228,000,000
$1,360,200,000
$176,900,000
$9,411,300,000
$400,703,600
$959,496,400
Present Value Factor
Present Value of RI
Book Value of Equity in 2004
Total PV of RI 2005-2013
Terminal Value (in 2013 dollars)
PV of Terminal Value
Estimated Value
Shares Outstanding 2004
Estimated Value Per Share
As of April 1st 2005
Actual Price Per Share
Cost of Equity (Ke)
Growth Rate (g)
1
2
3
4
5
6
7
8
9
2005
2006
2007
2008
2009
2010
2011
2012
2013 Terminal
$9,411,300,000 $10,626,266,915 $12,046,164,783 $13,641,095,530 $15,460,368,581 $17,541,258,852 $19,920,515,087 $22,649,006,346 $25,788,779,058
$1,424,030,400 $1,623,394,656 $1,850,699,908 $2,109,763,695 $2,405,130,612 $2,741,848,898 $3,125,707,744 $3,563,306,828 $4,062,169,784
$209,063,485
$203,496,788
$255,769,161
$290,490,644
$324,240,341
$362,592,663
$397,216,485
$423,534,116
$453,735,931
$10,626,266,915 $12,046,164,783 $13,641,095,530 $15,460,368,581 $17,541,258,852 $19,920,515,087 $22,649,006,346 $25,788,779,058 $29,397,212,911
$458,330,310
$965,700,090
$517,499,199
$1,105,895,457
$586,648,225
$1,264,051,683
$664,321,352
$1,445,442,343
$752,919,950
$1,652,210,662
$854,259,306
$1,887,589,592
$970,129,085
$2,155,578,659
$1,103,006,609
$2,460,300,219
$1,255,913,540
$2,806,256,244
0.953561552
$920,854,477
0.909279634
$1,005,568,217
0.8670541
$1,096,001,194
0.826789453
$1,195,076,484
0.788394634
$1,302,594,021
0.751782812
$1,419,057,410
0.716871185
$1,545,272,228
0.6835808
$1,681,813,992
0.651836369
$1,829,219,880
$9,411,300,000
$11,995,457,902
$57,623,331,496
$37,560,983,158
$58,967,741,060
1,021,100,000
57.74923226
56.39240037
43.71
0.0487
0
Ke
Ke
0.0687
0.0587
0.0487
0.0387
0.0287
Sensitivity Analysis as of August 31st 2004
g
0
0.02
0.04
0.06
$40.05
$48.79
$69.71
$186.83
$47.57
$61.90
$106.86
($1,231.51)
$57.75
$83.38
$226.87
($137.57)
$72.61
$126.66
($1,482.58)
($69.76)
$97.06
$266.91
($164.51)
($44.59)
0.0687
0.0587
0.0487
0.0387
0.0287
Sensitivity Analysis as of April 1st 2005
g
0
0.02
0.04
0.06
$38.53
$46.94
$67.06
$179.73
$46.01
$59.87
$103.36
($1,191.21)
$56.17
$81.10
$220.66
($133.81)
$71.02
$123.89
($1,450.10)
($68.23)
$95.47
$262.54
($161.82)
($43.86)
- 82 -
$2,806,256,244
Appendix 18 - Abnormal Earnings Growth Valuation
1
Earnings
Divendeds
DPS invested at 4.87%
Cum-Dividend Earnings
Normal Earnings
Abnormal Earning Growth (AEG)
2004
$1,360,200,000
$176,900,000
2005
$1,431,941,680
$209,063,485
2
2006
2007
$1,632,413,515 $1,860,951,407
$203,496,788
$255,769,161
$10,181,392
$9,910,294
$1,642,594,907 $1,870,861,701
$1,501,677,240 $1,711,912,053
$140,917,667
$158,949,648
PV Factor
3
4
5
6
7
8
Forecast Years
2008
2009
2010
2011
2012
2013
$2,121,484,604 $2,344,240,488 $2,590,385,739 $2,862,376,242 $3,062,742,579 $3,277,134,559
$290,490,644
$324,240,341
$362,592,663
$397,216,485
$423,534,116
$453,735,931
$12,455,958
$14,146,894
$15,790,505
$17,658,263
$19,344,443
$20,626,111
$2,133,940,562 $2,358,387,382 $2,606,176,244 $2,880,034,504 $3,082,087,021 $3,297,760,670
$1,951,579,741 $2,224,800,905 $2,458,405,000 $2,716,537,525 $3,001,773,965 $3,211,898,142
$182,360,822
$133,586,478
$147,771,244
$163,496,980
$80,313,057
$85,862,528
0.954
0.909
0.867
0.827
0.788
0.752
0.717
0.684
$134,373,669
$144,529,677
$158,116,698
$110,447,891
$116,502,056
$122,914,219
$57,574,116
$58,693,976
$1,431,941,680
PV of AEG
Total PV of AEG
Terminal Value (in 2013 dollars)
PV of Terminal Value
Total PV of AEG
Capitalization Rate (perpetuity)
Number of Shares Outstanding
Value Per Share
as of April 1st 2005
Ke
g
Actual Price per share
$903,152,302.61
$1,498,627,291.92
$1,024,432,842.98
$3,359,526,825.58
$68,984,123,728.64
1,021,380,521
$67.54
$65.95
0.0287
0.0387
0.0487
0.0587
0.0687
Sensitivity Analysis as of August 31st 2004
g
0
0.02
0.04
0.06
202.95
459.74
(192.46)
(11.18)
109.22
158.46
(1,307.25)
(20.45)
67.54
81.89
162.23
(41.82)
45.56
50.26
65.02
(374.47)
32.62
24.03
37.40
56.26
0.0287
0.0387
0.0487
0.0587
0.0687
Sensitivity Analysis as of April 1st 2005
g
0
0.02
0.04
0.06
199.63
452.21
(189.31)
(11.00)
106.83
154.99
(1,278.61)
(20.00)
65.69
79.65
157.79
(40.68)
44.07
48.62
62.89
(362.21)
31.38
23.12
35.98
54.12
0.0487
0
$43.71
Ke
Ke
- 83 -
Perp
$72,983,149
Appendix 19 - Long-run Residual Income Perpetuity
ROE
Ke
Growth
Be
Number of shares outstanding
16.92%
2.87%
6.00%
9,411,300,000
1,021,380,521
Long Run Average Residual Income Perpetuity
Be + [BE(ROA-Ke/Ke-g)]
Ke
Ke
- 84 -
$0.03
$0.04
$0.05
$0.06
$0.07
Sensitivity Analysis as of August 31st 2004
g
0
0.02
0.04
0.06
$54.32 $158.02 ($105.35) ($32.15)
$40.29
$73.52 ($915.76) ($47.24)
$32.01
$47.90 $136.84
($89.04)
$26.56
$35.52
$63.67 ($774.00)
$22.69
$28.23
$41.48 $115.66
$0.03
$0.04
$0.05
$0.06
$0.07
Sensitivity Analysis as of August 31st 2004
g
0
0.02
0.04
0.06
$53.43 $155.43 ($103.63) ($31.62)
$39.41
$71.91 ($895.70) ($46.21)
$31.13
$46.59 $133.10
($86.60)
$25.69
$34.36
$61.59 ($748.67)
$21.83
$27.16
$39.90 $111.26
- 85 -