Walgreen Company (NYSE:WAG)

CAPS Rating: 4 out of 5

Walgreen is your corner drugstore, selling prescription and OTC drugs and an array of other merchandise.

Recs

2
Player Avatar JohnCLeven (75.83) Submitted: 10/10/2012 8:08:40 PM : Outperform Start Price: $28.86 WAG Score: +100.99

Allow me to paint you a picture:
WAG has been growing robustly w/ a 10 yr avg EPS growth rate of 13%. Consensus earnings growth estimates are 12.33% per yr for next 5 years. But, let us assume that the analysts are grossly overestimating, and growth amounts to only 8% per yr. Combining that conservative 8% EPS growth rate with the 3% div yield = 11% annual returns even if WAG's current valuation multiples (12x earnings and 13x fcf ) remain this low. That's an 11% compounded annual returns in a pessimistic scenario. Now, imagine the returns if WAG simply meets expectations and/or valuation multiples expand from current lows. You could easily see 60% upside in 2-4 yrs.

Here’s a reasonable example of what I mean:
WAG earned 2.95 per share in 2011. At a conservative growth rate of 8%, WAG would earn 3.70 per share in 2014. Now, let’s up that P/E from today’s very low 12x to a much more reasonable 15x and you get a share price of $55.50. Add in the, at least, $3.50 in dividends WAG will pay you over the next 3 years, and you’re looking at $59 in value for a $35.63 stock. (An 18.31% compounded annual rate of return). That’s a very realistic 65% increase in value in 3 years. The S&P growing 65% in the next 3 years is not realistic. Outperform.

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Member Avatar JohnCLeven (75.83) Submitted: 12/5/2012 12:22:16 PM
Recs: 0

Head I win, tails I don't lose much.

Heads: WAG grows at a moderate clip, exceeds expectations, and gowth/divideds/buybacks translate into significant outperformance.

Tails: WAG dissappoints and growth is stagnant. Dividends+buybacks = single digit return which will probably match the market or underperform slightly.

Member Avatar JohnCLeven (75.83) Submitted: 1/4/2013 5:59:24 PM
Recs: 0

I also like that book.

Member Avatar JohnCLeven (75.83) Submitted: 1/14/2013 12:54:17 PM
Recs: 0

+23 on WAG so far. My best active pick at the moment. However, with a 7.3% cash adjusted FCF yield, and a 2.8% div yield, (10.1% total yield) I'm not ready to close WAG yet.

Member Avatar JohnCLeven (75.83) Submitted: 2/15/2013 10:17:56 AM
Recs: 0

Maybe i'm closing WAG early, but a 40% gain in under 8 months is fine with me, considering that WAG is probably on the lower end of quality compared to my other picks, and just made a questionable aquisition.

Member Avatar JohnCLeven (75.83) Submitted: 2/15/2013 10:54:59 AM
Recs: 0

Changed my mind!

What was I thinking? This is CAPs, not real life!!! Mt start price is going to decrease by a compunded rate of about 4% annually due to dividends. I'll have an adjusted start price around $20 in 8-10 years. At the same time if FCF increases just 5% per annum and you slap a 15x multiple on that, you have a share price of $66. That's over a 300% gain in the CAPs price, the S&P isn't going to triple in the next 10 years...but WAG will in CAPs at just a modest growth rate. Note to self: NEVER CLOSE THIS PICK.

Member Avatar valuemoneygreen (83.29) Submitted: 3/14/2013 8:21:32 PM
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Your last comment is a good idea. With consistant earners...when the market goes down your stock will most likely but it will most likely go down LESS than the market...... letting you pick up even more CAPS points. Like I stated in my WFC pitch... you should try to never sell unless you equity gets WILDLY overvalued. The forward PE on WAG is under 12 when WAG is trading @ $42.72. If the forward PE is over 20 on normalized earnings then I would end the pick. WAG would have to trade over $65! this year to make me end my pick.

Member Avatar JohnCLeven (75.83) Submitted: 5/9/2013 12:36:14 PM
Recs: 0

I noticed you ended your WAG pick the other day around $48 on your valuemoney page.

Do you really play your valuemoney page that much differently than valuemoneygreen, or has your overall opinion on WAG changed?

Member Avatar valuemoney (99.99) Submitted: 5/22/2013 2:07:18 PM
Recs: 0

No change. The company hasn't changed. The price has but if you would redo your pitch and compare it to the market as a whole (current prices) I bet WAG would still look like it would beat the market. If I would end it on my valuemoneygreen caps page you might want to ask why. My valuemoney page is playing the game. It is pretty much useless to look at and follow unless you are a trader maybe. Do yourself a favor and leave the pick open forever. Then you can go back and see why you should practice what you preach. You bought a great company at a great price. Why sell? Let people see why you should buy and hold it. Maybe you need to do it for yourself more than anything. Although it may not be a RL buy you can learn from it because YOU picked it. CAPS is a game but like most games when you are a little kid growing up it teaches you a lot. I know you know the numbers but it is totally different if you are involved in the pick. Get what I am saying? Too many people sell just because their stock has gone up. Ever hear Jim Cramer say sell half after the stock has went up? Play with the houses money. Well that is B.S. unless you are a trader or a gambler. Sure if a stock doubles and its valuation is stretched a long ways fine. What I would do is add WAG to you watch list at current prices and see how it does. Leave you pick alone. One more thing on this. If u sell WAG what would you buy instead? Ever hear how Warren Buffett got one of the guys who eventually or was an KO's board? He ended up investing a lot of money with Warren Buffett. He made great returns but cashed in and took the profits. That is in the 70's or I think. If he would have just left all of his money invested he would have been MUCH better of.

Member Avatar JohnCLeven (75.83) Submitted: 7/11/2013 12:53:35 PM
Recs: 0

WAG just raised the dividend 10%.

If they're hypothetically able to do that every year, for the next 12 years, I will have an adjusted starting price around $3.

Things probably won't go THAT well, but I do expect something close to that to occur, over the next 10-15 years, if WAG keeps growing.

Member Avatar JohnCLeven (75.83) Submitted: 2/3/2014 7:09:48 AM
Recs: 0

Please ignore anything I've ever said related to dividends and start prices, particularly on my WAG and PEP pitches. I completely misunderstood how CAPs accounts for dividends and start price changes.

Now, update on WAG:
WAG continues to be interesting.

First some negatives: WAG is one of the lesser profitable businesses in my CAPs portfolio, in terms of ROE and ROIC, and the trend is declining. This s something that will need to be watched closely, as well as the growth-by-acquisition model.

While barriers to entry are medium to high in WAG’s market, the existing competition is intense. When I stand WAG up next to CVS and WMT, I can’t really see a competitive advantage vs those other two. The Express Scripts debacle a few months back showed that WAG needs ESRX more than ESRX needs WAG. Again, the uncertainty here is slightly troubling.

The valuation is far less attractive (obviously) then when I opened the pick originally. (12-13x FCF when the pick was opened, now 17-18x) Still not terrible though.

At the end of the day, I think WAG is a very good business, but not a GREAT business, in my humble opinion. (The returns are not high enough, and their position is not dominant enough)

The main reason I am keeping this open is because WAG's management thinks that the deals with Alliance Boots, Amerisource, and others, are going to create a lot of value. (We’ll see if that turns or to be true or not) I'll give WAG the benefit of the doubt for now,

By 2016, Walgreen is targeting combined revenues of $130 billion, combined operating income of $8.5 billion and $9 billion, combined operating cash flow of $8 billion and total synergies of $1 billion.

This is pretty ambitious, I think, but if what they say is even remotely close to accurate, you’ll probably be looking at a business worth around $78-88 per share in by the end of 2016 (3 years from now). Perhaps $73 valuation or so, if things go far worse than expected, and perhaps $93 if things go far better than expected.

That’s a roughly 12%-17% annualized return range if what management says if even close to true, and 10% if they are exaggerating. You also have the 2% dividend for some added cushion.

Given that guidance, as well as where the S&P 500 is currently, it seems that keeping WAG open is still a good idea.

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