Walgreen Co. (WAG), together with its subsidiaries, operates a drugstore chain which provides its customers with access to consumer goods and services, pharmacy, and health and wellness services in communities across America. The company offers its products and services through drugstores, as well as through mail, telephone and online. The company sells prescription and non-prescription drugs, as well as general merchandise, including household items, convenience and fresh foods, photofinishing and candy. On August 2, 2012, it acquired 45% interest in Alliance Boots GmbH (Alliance Boots). In September 2012, the company completed the purchase of a regional drugstore chain in the mid-South region of the United States. In September 2012, WP Carey & Co LLC acquired five retail stores leased to Walgreen Co. In December 2012, the company completed a transaction giving the company an ownership stake in Cystic Fibrosis Foundation Pharmacy LLC.
Earlier this month, Walgreen reported its 4th quarter results (Fiscal Year 2013 results will be announced on October 1). Sales for the fourth quarter ending August 31, were $17.95 billion, up from $17.07 billion in the same quarter last year. Moreover, comparable stores sales for the quarter were up 4.5% in comparison to the same quarter last year, front-end comparable store sales were up 1.7%, comparable stores prescriptions filled were up 6.8%, and comparable pharmacy sales were up 6.2%. So it seems that after the resolution of the dispute that the company had with Express Scripts last year, the customer base has increased and the growth has followed. WAG also reported that calendar sales to date were $48.18 billion, up by 3.7% in comparison to 2012, and total sales for fiscal 2013 were $72.22 billion, up 0.8% compared to 2012. With this kind of result, expectations are high for the year-end results on October 1.
Company Comparable Analysis
WAG is currently trading at a higher PE and PS ratio than the main competitors, and is also above the industry average. But looking at the profitability margins, the management efficiency (ROE), the dividend yield, and the quarterly revenue growth, (which are all superior to its peers) it can be concluded that investors trust this company and are probably rightly willing to pay a higher price for its shares.
Looking at the financial position, it can be said the company is standing on solid ground, which is further confirmed by the S&P BBB (investment grade) rating and the stable outlook.
The quick ratio is second worst of all the peers; and the current ratio is also lower (although it is above the industry average). The company has higher debt levels; however, as indicated by the coverage ratio, WAG is making enough money to be able to cover the interest on outstanding debt.
WAG's last five fiscal years EPS are 2.17, 2.02, 2.12, 2.94, and 2.42, which is a growth 2.02% CAGR. EPS in the third quarter have also increased by 5% compared to same quarter last year.
What is of more importance to the growth of revenues is that the dispute between Walgreen and Express Script is over and, with the new deal between the two companies (signed September 2012), new customers are guaranteed to Walgreen. Moreover, the projected growth of 5.3% in U.S. prescription revenue in 2014 and 2015 provides a solid backdrop that revenues of WAG are going to grow in the coming years.
Outlook & Value
With projected EPS for the 4th quarter of 77 cents and actual of $1.88 for the previous 3 quarters; a rough valuation based on the P/E ratio is at least $63.
While by no means perfect, the dividend discount model can give us a ballpark estimate to consider if WAG is over/under priced. Taking a short growth rate of 14% (which is the lowest growth rate in the last 4 years) and long of 8% (which seems a fair assumption given the long-term EPS projections for the company) and historical dividend policy of the company, WAG has a potential value of $77.98.
With the current strong and stable financial results of the company, its superior operational performance in regards to its competitors, and its sound financial position; Walgreen is worth considering for a deeper analysis. From this brief first look, the company seems well positioned for future share price growth.
The Affordable Care Act expanding insurance to millions of Americans, and the projected growth of prescription revenue in U.S. would suggest continued future growth for the company. Moreover, with 8,585 stores across the U.S., Puerto Rico and Guam, the company is well positioned to capture any upside in the industry.
Based on our brief fundamental analysis, WAG appears to be currently trading lower than its intrinsic value, suggesting that the company is potentially undervalued by a significant percentage. A deeper company analysis, complete with a DCF valuation, may be in order following the October 1 announcement.