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Dustin Allen
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Investing, saving and managing money for retirement. I have consumed all the value investing material I can find and try to emulate the best of each. Experience is the best teacher...let's see what we can learn together.
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Margin of Value
  • Conviction Vs. Walgreen 0 comments
    Jun 20, 2012 1:28 PM | about stocks: WBA

    con·vic·tion [kuhn-vik-shuhn] noun: a fixed or firm belief.

    When I make an investment I try to do so with conviction. I use a screening criteria, I reference case studies, formulas and graphs that serve to feed my analytical thinking. I use all these tools to build a case for investment and conviction of my assessment.

    But what happens when I see my investment fall below my buy-in price and those red numbers show up on my holdings summary?

    My conviction wavers.

    My current worry is Walgreen. Walgreen Co., together with its subsidiaries, operates a chain of drugstores in the United States (and now Europe?).

    If you are not aware of the past few days' activity you must live under a rock. Just check out the news, articles and opinions from my favorite source for investing ideas and information.

    My history with Walgreen started with what I call a BAD NEWS BUY. I Purchased Walgreen near a 52 week low based on the Express Scripts debacle. I liked it in the $33 dollar range and believed that the problem with Express Scripts was fixable and would be fixed in a matter of time.

    After yesterday's announcement of a deal to buy 45% of Alliance Boots for $6.7B the stock has dropped nearly 6%.

    It is clear the Market is not happy with the acquisition. On the surface it looks like the biggest concerns are the exposure to the European economy, the price Walgreen paid for its stake in Alliance Boots and the company's blind eye to the domestic issues it is facing.

    The Numbers

    WAG vs. the BWB screen requirements:

    Revenue greater than 100M - This is a slam dunk for WAG. Since 2002 revenues have grown at a CAGR of 10% with an average margin of 29%.

    Current Ratio greater than 2 - As of this writing WAG has a ratio of 1.55. This falls short of our criteria and will change after the dust settles from this acquisition.

    Price to Book Ratio of less than 1.5 - As of this writing WAG is at 1.75

    P/E Ratio - Using the last three year average EPS the P/E ratio comes in at 12.20, below the required 15.

    Dividend Growth rate - 28% (5 year average.) WAG has paid dividends since 1933 and has a history of 37 years of increasing their dividend.

    EPS Growth and positive earnings in the last 10yr period - WAG has been in the black for the past ten years and grown at an 11.5% CAGR, well above the required 3%.

    WAG Price Data and Estimates:

    Method of Estimate


    20x Avg EPS


    Using the Graham Avg P/E


    Graham Value Equation


    Fair Value DCF


    Price on OE Estimate


    A price range of $35.94 to $63.81 has been established by the above methods of calculation. Price history of WAG ranges from a low of $22.09(2009) to $49.96(2006) for the last ten year period.

    My Conviction

    I liked WAG in the $33.00 range and I like it now at an even lower price.

    With a long term investment horizon, I believe WAG will return to its historical price levels and grow beyond. At an estimated future growth rate of 7%, WAG could provide a return of 5% annually if it reaches the FVDCF Price of 63.81 in the next ten years.

    However, I will be watching the developments of this acquisition closely and researching it on a deeper level (with a follow-up article).

    Bottom line - I believe WAG is a better company with this move and has the ability to make the most of it. Also, I have not lost the sight of reconciliation with Express Scripts on the home front.

    Disclosure: I am long WAG.

    Additional disclosure: I have strengthened my position on the news about Alliance Boots and the resultant price drop.

    Stocks: WBA
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