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Eric Cota
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I'm a value investor for the long term primarily focused on firms in the S&P 500 that produce solid free cash flow and pay dividends. I look for undervalued firms using a discounted cash flow model. I reinvest dividends and track performance on a total return, risk-adjusted basis. Five years... More
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  • Walgreen Company: Cash Flow Valuation Update 0 comments
    Dec 11, 2012 6:58 PM | about stocks: WAG

    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:

    YearFCF $Millions
    2003696
    2004713
    2005134
    20061102
    2007571
    2008814
    20092184
    20102730
    20112430
    20122881

    (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

    YearFCF $Millions
    02556
    12863
    23206
    33591
    44022
    54505
    Terminal Value46728

    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

    YearFCF $Millions
    02556
    12863
    23206
    33591
    44022
    54505
    Terminal Value57353
    • 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: WAG
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