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NYSE: WAG
Junying ShenXiaosi (Sarah) SongChi (Tracy) Zhang
Xiangyuan (Arthur) Zhong
Nov 6, 2012
AgendaIntroductionIndustry and Macroeconomic OverviewCompany OverviewRelevant Stock MarketFinancial AnalysisFinancial ProjectionsRecommendation
2
Current Portfolio Position
• 500 shares bought on Oct 6, 1999 @ $25.00
• Current Stock Price: $ 34.89 (Nov 2, 2012)
• EPS: $ 2.24
• Unrealized Gain: 36.32%
3
Pharmacies & Drug Stores Industry Overview
•Revenue: $238.5 billion•Annual Growth Rate since 2007: 1.7%•Profit: $5.2 billion•Major players:
▫ Walgreen 30.9%
▫CVS Caremark 27%
▫Rite Aid Corporation 11%
Source: WWW.IBISWORLD.COM
4
Pharmacies & Drug Stores Industry Structure
Source: WWW.IBISWORLD.COM
5
External Drivers
•Per capita disposable income•Private Health Insurance Coverage•Aging Population•Medicare, Medicaid & Obamacare•Generic Drug Wave
6
Per Capita Disposable Income• Per Capita Disposable Income determines a
person’s ability to purchase goods and services
• The growth is hindered by the negative Macroeconomic outlook though
7
Private Health Insurance Coverage
• Pros: Private health insurance membership can lower the price of pharmaceutical and hence increase the demand for the industry
• Cons: Managed care organizations associated with health insurance plans can give lots of pressure on drug price and cut profitability margin
8
Aging Population• Baby boomers are getting old and this will bring
huge opportunities for the industry because senior people has a higher demand for medical services
Source: WWW.IBISWORLD.COM
9
Medicare, Medicaid & Obamacare• Medicare and Medicaid subsidize prescription
drug purchases and can spur demand for the industry
• Obamacare is aimed at increasing the insurance coverage, which may bring opportunities
• But you’ll never know until tonight….
10
Generic Drug Wave • After the expiration of the patent of a medication, a
generic version of the drug can be produced and sold• Generic drugs have the same effect but are much cheaper
compared to brand name drugs• Normally generic drugs have a higher gross profit margin
for pharmacy retailers, partially because of generic drug producers have smaller bargaining power
• In the next few years, there will be lots of brand drugs lose patents
Source: WWW.IBISWORLD.COM
11
Threats
•Pharmacy Benefit ManagersThird party administrator of prescription
drug programs, primarily responsible for processing and paying prescription drug claims
•Diversified Supermarkets
12
Pharmacy Benefit Managers• PBMs are the primary contact of the pharmaceutical supply
chain to many patients
• PBMs’ major tools:▫ Pharmacy networks: PBMs build networks of retail pharmacies to provide
customers convenient access to prescriptions at discounted rates▫ Mail Service pharmacies: PBMs provide home-delivered prescriptions to
consumers
• PBMs aggregate the buying clout of millions of enrollees through their client health plans to obtain massive bargaining power over pharmacy retailers
• PBMs are encouraging consumers to use their mail service instead of going to pharmacy retailers and also pressing the pharmacy retailers to charge a lower price for the drugs
13
•Major players:▫ Medco Health Solutions 32.3%▫ CVS Caremark 27.3%▫ Express Scripts Inc. 21.6%▫ UnitedHealth Group Inc. 9.8%
•Consolidation▫ Express Scripts acquired Medco Health Solutions with
$29.1 billion in 2012▫ SXC Health Solutions bought Catalyst Health Solutions
with &4.14 billion in 2012
Pharmacy Benefit Managers
14
Diversified Supermarkets
•Big retailers like Wal-Mart and King Soopers are stepping into the pharmacy supply chain and we’ve already seen pharmacy shops in many supermarkets
15
Walgreen Co. (NYSE: WAG)Fiscal year ended: Aug. 31, 2012
• Incorporated: 1901 in Illinois, US, retail drug store chain: Prescription, non-prescription drugs and general merchandise
• Net sales: $71.6 billion• Net earnings: $2.1 billion• Employees: 240,000• Prescription sales: 63.2% (2012) vs. 64.7% (2011)
Source: 2012 Walgreens Annual Report
Revenue in Millions
16
Number of stores and locations
Store GrowthFiscal Year 2012 2011 2010 2009 2008 2007
New Locations 212 261 388 602 608 501
Acquisitions 54 36 282 89 423 120
Closings 91 133 120 129 94 85
Net Openings 175 164 550 562 937 536
Locations 8385 8210 8046 7496 6934 5997
Sales Area* 87049 85619 83719 78782 72585 66386
# of Locations Location Type 2012 2011 2010 2009Drugstores 7930 7761 7562 6997Worksite Facilities 366 355 367 377Infusion and Respiratory Services Facilities
76 83 101 105
Specialty Pharmacies 11 9 14 15
Mail Service Facilities 2 2 2 2Total 8385 8210 8046 7496
Source: 2012 Walgreens Annual Report
17
New store growth expansion into new markets
FY 2012 Overview
18
• June 21, 2011, unable to reach a contract agreement with pharmacy benefit manager Express Scripts, Inc., exited the network as of Jan 1, 2012 sales impact
• Signed a multiyear agreement with Express Scripts to participate in its broadest retail pharmacy on Jul 19, 2012
• On Sep 15, customers began to return positive effect on WAG’s net sales, earnings and CFs
Source: 2012 Walgreens Annual Report
19
Launched its innovative Balance Reward loyalty program on Sep 16, 2012
Source: http://investor.walgreens.com/
As of Sept 28, 2012
20
Creating Value Through Synergies
• Strategic partnership with Alliance Boots to create the first global pharmacy-led, health and wellbeing enterprise
• Closed on first phase of the transaction in August, acquiring a 45% stake. (Full combination in 3 years)
• Investment : $4.0 Billion in cash and 83.4 million common stock
• Multinational pharmacy-led health and beauty group• Over 3,330 retail locations in Europe
Source: 2012 Walgreens Annual Report
21
Stock Performance Over 5 years
CVS SPX WAG RAD
Source: Bloomberg
22
Financial Analysis- Liquidity Measure
Quick Ratios: WAG vs. Industry
23
Financial Analysis- Probability Indicator
ROIC: WAG vs. Industry
24
Financial Analysis- Debt Ratios
Debt to Equity: WAG vs. Industry
25
Financial Analysis
•Among Walgreens’ total stores:▫20% owned▫80% leased
•Caution: $35,356 mm (PV) of operating leases are not reported on balance sheet, which are their contractual obligations and commitments.
• Significantly higher obligation level
26
Financial Analysis- Operating Performance
Inventory Turnover: WAG vs. Industry
* Accounting method of booking Alliance Boots acquisition do not allow us to use asset turnover ratio.
27
Financial Analysis- Investment Valuation Ratios
PE ratio: WAG vs. Industry
28
Financial Projection•Step one:
▫Invest a total of $6.7 bil. in cash ($4 bil.) and stock (83.4 mil. shares) for 45% equity stake in Alliance Boots
•Step two (after 2.5 years; done within 6 months) :▫At share price on Aug 2, 2012 and at
exchange rate of $1.55=£1, invest a total of $9.5 bil. in cash($4.9 bil.) and stock(144.3 mil. shares)
29
• Income Statement▫45% of Alliance Boots’ operating income
added to year 2013 2014 ▫100% of Alliance Boots’ operating income
added to year 2015 2016 2017▫Interest expense of $3.5 bil. (w/ 2.2%
weighted average interest) added to year 2013 2014
▫Interest expense of $4.9 bil. (w/ 2.2% weighted average interest) added to year 2015 2016 2017
30
Financial Projection on Income Statement
•Balance Sheet▫Use the equity method of accounting
book Alliance Boots’ purchased equity into Walgreens asset
2012: 1st step, $6.7 bil. cash and stock 2015: 2nd step, $9.5 bil. cash and stock
▫Short Term Borrowing▫Long Term Borrowing
31
Financial Projection on Balance Sheet
32
Source: http://investor.walgreens.com/
Short Term and Long Term Borrowing
Comparable Analysis
33
Price = $39.05
Valuation
34
$30.84
$39.05
$33.31
Recommendation
35
HOLD