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Walgreen Company (NYSE:WAG) has consistently grown its dividend for a long time; as a result, some investors immediately jump on board of the company without considering the fundamentals any further. Intelligent Investors know to avoid such speculation by basing their analysis on fundamentals and factual data. Each investment opportunity must be evaluated in order to determine if the company is trading below its intrinsic value. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Walgreen Company fares in the ModernGraham valuation model.

WAG Chart

WAG data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price$64.20
MG Value$54.72
MG OpinionOvervalued
Value Based on 3% Growth$40.84
Value Based on 0% Growth$23.94
Market Implied Growth Rate7.15%
Net Current Asset Value (NCAV)-$4.99
PEmg22.79
Current Ratio1.33
PB Ratio3.05

Balance Sheet - 11/30/2013

Current Assets$11,722,000,000
Current Liabilities$8,821,000,000
Total Debt$4,501,000,000
Total Assets$36,481,000,000
Intangible Assets$3,799,000,000
Total Liabilities$16,460,000,000
Outstanding Shares950,170,000

Earnings Per Share

2014 (estimate)$3.35
2013$2.56
2012$2.42
2011$2.94
2010$2.12
2009$2.02
2008$2.17
2007$2.03
2006$1.72
2005$1.52
2004$1.32

Earnings Per Share - ModernGraham

2014 (estimate)$2.82
2013$2.50
2012$2.43
2011$2.37
2010$2.06
2009$1.99

Dividend History

WAG Dividend Chart

WAG Dividend data by YCharts

Conclusion:

Walgreen Company does not pass enough of the requirements of either the Defensive Investor or the Enterprising Investor in order to be suitable for investment by Intelligent Investors. Specifically, the company fails the Defensive Investor's current ratio, PEmg ratio, and PB ratio requirements. The company fails the Enterprising Investor's requirements by having too much debt relative to its current assets. As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham's methods should research other opportunities, such as through a review of ModernGraham's valuation of CVS Caremark Corporation (NYSE:CVS) or ModernGraham's Glance at the Dow. From a valuation perspective, the company has grown its EPSmg (normalized earnings) from $1.99 in 2009 to an estimated $2.82 for 2014. This level of growth is solid, but does not support the market's current implied estimate for earnings growth of 7.15%, leading the ModernGraham valuation model to estimate that the intrinsic value is below the market price at this time.

The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on Walgreen Company Where do you see the company going in the future? Is there a company you like better?

Disclosure: The author did not hold a position in Walgreen Company (WAG) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Annual Valuation Of Walgreen Company