Walgreens

1
Walgreens

• David Mizell
• Date Presented
• 12/09/2004

2
Recommendation

• Recommendation Hold
• Own 1,000 Shares in Walgreens
• Purchased at 25/share on 10/6/1999
• Cost Basis is 25,000
• Trading at 38.31 as of 12/8/2004
• Value currently 38,310
• Stock has gained 13,310 over holding period, up
  53.24

3
Company Overview

• Industry
• GICS Drug Retail
• Competitors Rite Aid, CVS, Osco
• Corporate Info
• Founded in 1901 by Charles R. Walgreen, Sr. in
  Chicago
• Operate in 44 states
• Have 4,582 stores and 163,000 employees as of
  8/31/2004
• Expect to have 7,000 stores by 2010

4
Company Overview

• Innovations
• Introduction of Lunch Counters 1910
• Ice cream when warm
• Hot food when cold
• The Malted Milkshake
• First Drugstore Chain to Advertise on radio
  1931
• Profit-Sharing and Pension Plans
• Self-Service Retailing
• Largest Private Satellite User

5
Past Financial Performance

• Total revenues were
• - 28,681,100,000 in 2002
• - 32,505,400,000 in 2003
• - 37,508,200,000 in 2004
•  Basic net earnings per share
• - 1.00 in 2002
• - 1.15 in 2003
• - 1.33 in 2004

6
Walgreens Numbers

• Market Cap is 39.15B
• P/E (ttm) is 29.04
• EPS (ttm) is 1.33
• Revenue (ttm) is 37.51B
• Operating Margin (ttm) is 5.71
• Profit Margin (ttm) is 3.63
• Beta is .259

7
Stock Price Over Last 5 Years
8
Financial Analysis

• P/E Approach
• Returns a price of 44.45
• DCF
• Returns a price of 38.24
• View Excel Spreadsheet

9
Walgreens vs. SP 500
10
Competitor Comparison

• Walgreens
• Market Cap39.15B
• Employees 117,000
• Rev. Growth (ttm)15.40
• Revenue (ttm)37.51B
• Net Income (ttm)1.36B
• EPS (ttm)1.33
• P/E (ttm)29.04
• CVS
• Market Cap18.07B
• Employees 100,000
• Rev. Growth (ttm)10
• Revenue (ttm)29.12B
• Net Income (ttm)912.6M
• EPS (ttm)2.233
• P/E (ttm)20.23

• Rite Aid
• Market Cap1.78B
• Employees 36,250
• Rev. Growth (ttm)5.1
• Revenue (ttm)16.87B
• Net Income (ttm)172.06M
• EPS (ttm).039
• P/E (ttm)11.13

11
WAG vs. CVS and RAD (1 year)
12
WAG vs. CVS and RAD (5 year)
13
Porters Five Forces

• Threat of New Entrants Moderate
• Threat of Substitutes Low
• Bargaining Power of Buyers High
• Industry Rivalry High
• Bargaining Power of Suppliers Low

14
Macroeconomic Review

• Aging Population
• 12.4 Over Age of 65 2001
• Growing Due to Retirement of Baby Boomers
• Importation of Drugs from Canada
• Could Deprive Walgreens of Revenue
• Being Discussed or Implemented across US by
  States
• Canadian Parliament is Concerned
• Bush Against the Policy

15
Macroeconomic Review

• Domestic Political Health Care Issues
• New Medicare Prescription Drug Plan
• Adds 75-100 Million New Prescriptions into the
  Market
• Does Reduce Amount Medicare Pays Each Individual
  Prescriptions Make up in Volume
• Medical Savings Accounts-Bushs Plan

16
Company and Business Practices

• Currently have 4,582 stores in 44 states as of
  8/31/2004
• Opened 436 stores in 2004
• Goal to open 450 stores in 2005
• Major Expansion in CA, NC, SC, FL, TX, WA
• Expect to have 7,000 stores open by 2010

17
Company and Business Practices

• Revenues
• Drug and In-Store Merchandise Sales
• Gained Market Share in 55 of top 60 Product
  Categories Food, Drug, and Merchandise
• Mail Order Business
• Advantage90 Plan
• Prescriptions account for 62 of total sales

18
Company and Business Practices

• Leases
• No Debt, but Billions in Leases
• 18 of Locations Owned, Rest Leased
• Have roughly 20 Billion in Future Lease Payments
  Most Leases 20-25 Years
• Approx. 2 Billion Due Next Year Alone

19
Company Updates

• Walgreens is expanding rapidly.
• Added 436 stores in 04
• Expect to add 450 stores in 05
• Aging Population and New Medications will Benefit
  Walgreens
• Concerns
• Political Issues
• Mail Order Competition
• No Debt, but a Large Amount of Leases

20
Recommendation

• Recommendation Hold 1,000 shares
• I believe Walgreens will continue to lead their
  industry and rapidly expand. The demographic
  changes in America will greatly benefit them,
  especially over the next 5-10 years as the Baby
  Boomer generation starts to retire. Over the
  next 15-20 years, the number of retired persons
  in America is expected to increase dramatically.
  All of these factors point to Walgreens having
  continued success in the short and long term.
• Questions?