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Walgreen Company: Cash Flow Valuation Update

|Includes:Walgreens Boots Alliance, Inc. (WBA)

Current Price: ~ $37/share
Yield: ~ 2.75%

Walgreen is the nation's largest retail pharmacy, with about 7,900 drugstores located throughout the U.S. Prescription drugs account for about two thirds of sales, with most of the rest attributable to nonprescription drugs and convenience items such as packaged foods, greeting cards, photofinishing, and household and personal care products. The company also operates in-store and work-site health clinics.

Estimated WACC for the firm today is 10.80% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year FCF $Millions
2003 696
2004 713
2005 134
2006 1102
2007 571
2008 814
2009 2184
2010 2730
2011 2430
2012 2881
Click to enlarge

(click to enlarge)Click to enlarge

Average Annual Growth FCF: ~ 93%

CAGR FCF: ~ 17%
Consensus Forecast Industry 5-Year Growth: ~ 12% per year

Consensus Forecast Company 5-Year Growth: ~ 12% per year

Internal Growth Rate: ~ 4%

Sustainable Growth Rate: ~ 8%

Scenario 1
Average FCF (2009 - 2012) is $2556 million

  • Start at $2556 million FCF
  • Assume a 5-year growth rate in FCF of 12% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 2556
1 2863
2 3206
3 3591
4 4022
5 4505
Terminal Value 46728
Click to enlarge

The firm's future free cash flows, discounted at a WACC of 10.80%, give a present value for the entire firm (Debt + Equity) of $41189 million. If the firm's fair value of debt is estimated at $6510 million, then the fair value of the firm's equity could be $34679 million. $34679 million / 944 million outstanding shares is approximately $37 per share and a 20% margin of safety is $30/share.

Scenario 2
All else being equal,

  • Assume a 5-year growth rate in FCF of 12% per year, then 2% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 2556
1 2863
2 3206
3 3591
4 4022
5 4505
Terminal Value 57353
Click to enlarge
  • Present Value of the entire firm (Debt + Equity): $47552 million
  • Value of Equity: $41042 million or $43/share
  • 20% margin of safety is $34/share

Sources

Morningstar.com

Yahoo! Finance

Walgreens.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: WBA