As the world's 5th most admired company, operating 8,681 drugstores and accommodating 73,000 healthcare professionals, Walgreen (WAG) Company is serving in such a way that 70 percent of Americans live within 5 miles of a Walgreens community pharmacy.
The purpose of this article is to estimate the fair value of the stock incorporating the company's future prospects and interpreting the past performance of the industry in order to help readers decide if the stock is undervalued or overvalued.
As a percentage of GDP, healthcare expenditure is growing in countries in every income group. This increase is sharp in mature markets and historically the industry has made most of its revenues from these mature markets.
Americans spend more than twice per capita on healthcare than other developed countries.
By 2038, total U.S. healthcare expenses, both private and public, are anticipated to increase to nearly 22 percent of GDP.
According to The Common Wealth Fund, U.S. national health expenditures are estimated to rise to $4 trillion in 2018 and $5.5 trillion in 2023. Households are expected to represent 26 percent of national health expenses in 2018 and 2023 as well while private employers may represent 25 percent of national health expenses in 2018 and 24 percent in 2023.
The global pharmaceutical market is likely to be worth around $1.6 trillion or more by 2020. On a standalone basis, the U.S. is leading the chart with anticipated sales of $425 billion.
Source: Pharma 2020
Walgreen Company is leading the profitability chart compared to the industry performance. For the trailing twelve months, the company recorded a 28.91 percent gross profit margin while the industry's gross profit margin was limited to 16.94 percent. The company's operating margin of 5.68 percent and net profit margin of 3.74 percent, for the last twelve months, showcases the company's competence compared to the industry's operating margin of 3.27 percent and net profit margin of 2.14 percent.
Management's effectiveness is the core driver of the successful execution of the company's business plans and sustainability of profits. The company has been outperforming the industry averages in terms of returns on assets, investments, and equity. Trailing twelve months returns revealed the aptitude and proficiency of the company's management.
The Walgreen Company has outperformed the industry averages for the past five years. The company fetched almost double the profitability margins of the industry. For the last five years, the average return on assets of 8.06 percent, return on investment of 11.11 percent and return on equity of 14.6 percent compared to the industry's average return on assets of 3.6 percent, return on investment of 7.1 percent and return on equity of 8.55 percent showcase the fact that the company has remained unbeatable.
Generosity has been observed in the case of the company sharing profits with shareholders. Walgreen's dividend yield is 2.09 percent while the industry's dividend yield stands at 1.32 percent. Over the past five years the average dividend yield for the company stood at 2.17 percent against the industry's 1.38 percent. The dividends grew 23.46 percent in the last five years while the industry's dividend underwent a growth of 9.54 percent. Overall the industry's dividend payout ratio of 22.94 percent for the last twelve months is well below Walgreen's payout ratio of 40.92 percent.
WAG outperformed the S&P 500 by almost 23 percent providing shareholders with a total return over the last five years of 145.3 percent compared to the S&P 500's return of 118.3 percent.
Together with AmerisourceBergen and Alliance Boots, Walgreen is uplifting the growth strategies across the U.S. and beyond. Alliance Boots is the world's leading integrated wholesale-retail pharmacy provider while AmerisourceBergen is America's largest pharmaceutical supply chain company.
Source: Annual Shareholder Meeting 2014
In fiscal year 2016, the company expects to generate more than $130 billion in revenues, an operating cash flow of $8 billion and combined synergies from Alliance Boots of $1 billion.
Through a strategic 10-year distribution agreement with AmerisourceBergen, Walgreens is providing expanded service levels, more frequent deliveries and improved economies via operational efficiencies.
According to Trefis, 61.1 percent of WAG's price comes from prescription sales while over-the-counter drugs and general merchandise constitute the remaining 38.9 percent.
Based on price multiples, the stock seems a bit expensive. By looking at the price to cash flow multiple for the trailing twelve months, one may start thinking of avoiding the stock. However, the reason for the higher multiples is the fact that the stock is trading at a premium price which is driven by its higher-than-expected earnings growth rate of 13.26 percent for the next five years compared to the industry growth rate of 12.9 percent.
The company's PEG ratio of 1.32 compared to the industry's PEG ratio of 2.58 denotes the fact that the stock is still undervalued compared to the industry. The sustainability of Walgreen's profitable performance and its current propensity to efficiently explore future endeavors makes it a stock worth buying.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article