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A Value Estimation of Walgreen Co.

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

Walgreen Co. (Walgreens) is engaged in retail drugstore business. As of August 31, 2009, the Company operated 7,496 locations in 50 states, the District of Columbia, Puerto Rico and Guam. During the fiscal year ended August 30, 2009 (fiscal 2009), the Company opened or acquired 691 locations. Total locations do not include 337 convenient care clinics operated by Take Care Health Systems, Inc. within the Company’s drugstores. The Company’s drugstores are engaged in the retail sale of prescription and non-prescription drugs and general merchandise. General merchandise includes, among other things, household items, personal care, convenience foods, beauty care, photofinishing, candy, and seasonal items. Walgreens offers customers the choice to have prescriptions filled at the drugstore counter, as well as through the mail, by telephone and through the Internet. In January 2010, the Company announced that it has completed the acquisition of the assets of 12 Eaton Apothecary pharmacies.

Does WAG make for an intelligent investment or intelligent speculation today? Starting with a base estimate of annual Free Cash Flow at a value of approximately $2,700,000,000 and the number of shares outstanding at 978,430,000 shares; we used an assumed FCF annual growth of 6 percent for the first 10 years and assume zero growth from years 11 to 15.  Review the Free Cash Flow record here:

The resulting estimated intrinsic value per share (discounted back to the present) is approximately $40.39.

  Market Price = $30.09
  Intrinsic Value = $40.39  (estimated)
  Debt/Equity ratio = .16
  Price To Value (P/V) ratio = .74  and the estimated bargain = 26. percent.

Before we make a purchase, we must decide ( filter #1 ) if WAG is a high quality business with good economics. Does WAG have ( filter #2 ) enduring competitive advantages, and does WAG have ( filter #3 ) honest and able management.

The current price/earnings ratio = 14.1
It 's current return on capital = 11.69
Using a debt to equity ratio of .16, WAG shows a 5-year average return on equity = 17.5

Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding.

Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.

Does WAG make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today?

Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misapraised. In terms of Opportunity Cost, is WAG the best place to invest our money today?


How will WAG compete going forward? Keep in mind that a financial report like this is a reflection of the past and present. It may be used to project a future, but it may not account for factors yet unseen. Therefore, pay attention to competitive and market factors that may affect changes in profitability.

In summary, using a debt to equity ratio of .16, WAG shows a 5-year average return on equity = 17.5 .
The estimated intrinsic value per share (discounted back to the present) is approximately $40.39. The Market Price = $30.09  and the Debt/Equity ratio = .16
The Price To Value (P/V) ratio = .74  and the estimated bargain = 26. percent.
Going forward, are there any tranformational catalysts or condition indicators imaginable on the horizon?

As always, I appreciate hearing your views,

Bud Labitan
Author of the new book 'Price To Value'

Author of 'The Four Filters Invention of Warren Buffett and Charlie Munger'

Author of a new book that will be available on  July, 2010
Valuations  +  30 Intrinsic Value Estimations in the style of Warren Buffett and Charlie Munger

Labitan Partners


Disclosure: no positions