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
|
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
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
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.
Year
|
FCF
$Millions
|
0
|
2556
|
1
|
2863
|
2
|
3206
|
3
|
3591
|
4
|
4022
|
5
|
4505
|
Terminal
Value
|
46728
|
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,
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
|
- 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
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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