COMPANY PRESENTATION
Walgreen Company
An Overview
Agenda
Walgreen Company is a
national drugstore chain with
3,619 drugstores in 43 states
and Puerto Rico. The
drugstores are engaged in the
retail sale of prescription and
nonprescription drugs, and
carry additional product lines
such as general merchandise,
cosmetics, toiletries,
household items, food and
beverages. Customer
prescription purchases can be
made at the drugstores as well
as through the mail, by
telephone and on the Internet.
Business Description
Industry Comparison
Highlights
5 Forces Analysis
Quantitative Analysis
Stock Performance
Future
Problems / Concerns
DCF
Sensitivity Analysis
Recommendation
Industry Comparison
Key Comparison Factors
Walgreens
CVS
Rite-Aid
Market Capitalization
32.5 Billion
9.67 Billion
1.04 Billion
Shares outstanding
1.02 Billion
392.6 Million
515.1 Million
Cash on hand (MRQ)
286 Million
333.3 Million
270.9 Million
32.1
30.1
N/A
0
0.27
N/A
0.5
0.59
0.29
ROE (TTM)
18.20%
7.41%
N/A
Profit Margin (TTM)
3.60%
1.50%
-3.10%
Institutional Ownership
59%
84%
36%
# of Stores
3619
4191
3497
P/E Ratio (TTM)
Debt to Equity Ratio (TTM)
Beta
Industry Comp. Details
Walgreens sees CVS pharmacy as its biggest competitor. While both are huge
pharmacy/convenience stores Walgreens has an advantage in that we feel its
stores are better laid out and more customer friendly. From an operating
standpoint Walgreen has more efficient operations as can be seen from profit
margin and Return on Equity.
Other positive notes about Walgreens are that its institutional ownership is lower
then CVS which means that there is more room for additional buyers to bid up the
stock price. Furthermore, Walgreens does not have a long-term debt burden and
finances most growth with cash and short term debt. It is not assumed that they
will need to take on a large amount of debt in the future.
Negatives, which will be discussed in further detail, include a high P/E ratio and a
question of whether past growth is sustainable.
On the following slide a breakdown of ROE illustrates why Walgreen has a higher
ROE then CVS even though there are many more shares outstanding.
Breakdown of ROE
2001
CVS
2001
WAG
ROE(Net Income/Equity)
#1 (Tax Burden ratio)
Net Profits over
Pretax Profits
#2 (Interest Burden ratio)
Pretax Profits over
EBIT
#3 (Return on Sales)
EBIT over
Sales
#4 (Asset turnover)
Sales over
Assets
#5 (Leverage ratio)
Assets over
Equity
#3 times #4 = ROA
#6 (compound leverage)
which is #2 times #5
413.2
709.6
58.23%
884.87
1,421.97
62%
709.6
770.6
0.92
1,421.97
1397.57
1.02
770.6
22241
3.46%
1397.57
24,623.00
6%
22241
8628.2
2.58
24,623.00
4393.9
5.60
8628.2
4566.9
1.89
4393.9
5207.2
0.84
8.93%
32%
1.74
0.86
HIGHLIGHTS
HIGHLIGHTS CONTINUED
Discussion Of Highlights
The previous figures came from Waglreen’s annual reports and illustrate their
success. One thing to note is that Walgreens has a steady growth in all areas,
which is a positive. Therefore, there is no reason to think their past growth will
not be sustainable into the future. Everything management mentions in past
annual reports has been completed, which allows shareholders to place a great
amount of trust in promises made by management.
5 Forces Analysis
Entry of New Competitors
New competitors would have to compete with major players already in the
industry. Threat of new competitors is low.
Threat of Substitutes
Threat of substitutes is high since there are many competitors selling the
same product. Convenience is most important.
Bargaining Power of Buyers
Low because people are not going to shop around to save a few pennies, once
again convenience is most important.
Bargaining Power of Sellers
Low because Waglreens purchases large amounts of goods and is a very large
account for a firm.
Rivalry Among Existing Competitors
High, you can get prescription drugs at many stores, which make up 58% of
Wagreens’ annual sales, also you can get other goods Walgreens sells at any
corner store. Convenience is key factor.
Qualitative Analysis
How is Walgreen Co.
obtaining and executing
its competitive
advantage?
Cost Leadership
Differentiation
Focus
Stuck in the Middle
Walgreens will continue selling the same type of
products with an increasing portion of their
revenue coming from prescriptions. They do not
plan on entering other markets when it comes to
items sold.
Pursuit of more than one
Strategy
Sustainability
Generic Strategies and
Organizational Structure
Generic Strategies and
Strategic Planning
Stock Performance
Stock Performance
As can be seen from the five year chart, Walgreens has done very well. One thing
to note over the past year is the resistance seen around $40. The stock has been
unable to break through that price range and most likely will not do so until the
overall market picks up. With a company as widely held and followed, the stock
price will move a great deal with the market. Therefore, one issue in judging the
stock price as of today has to take into account what the market is doing.
Future…
• Distribution Centers under construction in Da0llas,
Northern Ohio, and Florida.
• 2004 – Will open new Distribution Center in Southern
California ($140M).
• Will Spend $1.3B in 2002 on new stores, distribution
centers etc.
• Expecting 40% prescription sales increase by 2006.
• 6000 Stores by 2010.
*All above information came from the 2001 Annual Report
Problems / Concerns
A little pricey- Walgreens does have a high P/E ratio
Is expansion sustainable? – It is believed that expansion is sustainable
Expectation of aging baby-boomers already priced into share price? – To an extent,
however if Walgreens meets prescription sales expectations there will not be a large
effect to the stock price
DCF (See Excel)
Sensitivity Analysis
•
Growth In Sales + - 5%
•
•
Growth at 21.40%
Growth at 12.4%
•
Cost of Goods Sold + - 5% change, holding Growth at 17.40%
•
•
78% of Sales
68% of Sales
•
WACC + - 3%
•
•
WACC at 15%
WACC at 9%
$45.96
$34.40
$21.62
$59.22
$30.67
$62.04
Recommendation
Walgreens is a great company that has met expectations for years, and been able
to grow very succesfully. It is an all-star company and the market has priced the
stock this way. One problem will be if Walgreens ever does dissapoint investors.
Since investors are paying more for this company any dissapointing news could
have a drastically negative effect on the stock price.
The company has a great business plan, room to expand into other locations and
has met all promises made by management. However, in terms of competition, a
consumer is going to choose whether to go to CVS or Walgreens based on
convenience. Even if one store has cheaper prices a person will want to save
time by going to the most convenient (and closest) location. Therefore, there is
room for Walgreens to expand and gain more market share while increasing
growth.
In terms of the current stock price in relation to the valuation, Walgreens should
be held at this moment. A sensitivity analysis shows that a slight change in
growth will not drastically change things. A change in the cost of goods sold,
however, would change things. However, Walgreens will continue selling the
same product mix so there is no reason to believe that their cost of goods sold
will change. At its current price, given market conditions and the high P/E of the
stock our recommendation is the following:
Hold and take another look at the stock at a level above $37.