Current Price: ~ $34/share
Projected Yield: ~ 2.63%
Walgreen is the nation's largest retail pharmacy, with about 7,800 drugstores located throughout the United States. 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 10.58% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
|
Year
|
FCF
$Millions
|
|
2002
|
539
|
|
2003
|
696
|
|
2004
|
713
|
|
2005
|
134
|
|
2006
|
1102
|
|
2007
|
571
|
|
2008
|
814
|
|
2009
|
2184
|
|
2010
|
2730
|
|
2011
|
2430
|
|
TTM
|
1928
|
Average Annual Growth FCF: ~ 94%
CAGR FCF: ~ 18%
Consensus Forecast Industry 5-Year Growth: ~ 14% per year
Consensus Forecast Company 5-Year Growth: ~ 9% per year
Internal Growth Rate: ~ 8%
Sustainable Growth Rate: ~ 16%
Starting at $2430 million FCF, assume the company achieves a 5-year growth rate in FCF of 9% per year, then no growth or 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
|
Year
|
FCF
$Millions
|
|
0
|
2430
|
|
1
|
2649
|
|
2
|
2887
|
|
3
|
3147
|
|
4
|
3430
|
|
5
|
3739
|
|
Terminal
Value
|
38505
|
The firm's future cash flows, discounted at a WACC of 10.58%, give a present value for the entire firm (Debt + Equity) of $34922 million. If the firm's fair value of debt is estimated at $2626 million, then the fair value of the firm's equity could be $32296 million. $32296 million / 874 million outstanding shares is approximately $37 per share and a 20% margin of safety is $30/share.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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