Company Review – Walgreen Company

Walgreen Co.

As always our valuation follows Warren Buffett’s approach for the business review, and Benjamin Graham’s method for equity valuation. Please note our methods are clearly described on our website.
Business and Management Review

1) Is the business simple and understandable?

Walgreen Co. is a retail drug business specializing in consumer goods and pharmaceutical items. The company operates roughly 5,500 stores in forty seven states including Puerto Rico. The overall business model is to stock items the consumer is seeking in a timely manor and conversely sell these same items while generating the greatest amount of turns per square feet of retail space.  

2) Does the business have a consistent operating history?

Walgreen’s has enjoyed over one hundred years of operations and has consistently outperformed competitors. More recently, over the past five years Walgreen’s has increased not only sales, but also market share nationwide. Net income has as well increased proportionately to sales dictating that the company is doing a fine job of increasing sales but not by increasing overall costs as well.

3) Does the business have favorable long term prospects?

We find that Walgreen will continue to perform to the level that investors have come accustomed to in the future. The company still has locations that will be opened in the near future, and potential market share that could be taken away from competitors. We feel that the company is still in a growth phase, even though the company is maturing over time, it sill has much room to grow in the future.  

4) Is management rationale?

There is no reason to assume that management is not rationale in their management decisions. Based upon the performance management has shown, we have faith they will continue to act in the best interest of the company and the investor. 

5) Is management candid with its shareholders?

Walgreen’s does have an investor relation page on their website, but we feel it falls short of disclosing easily the type of information an investor seeks. The page is limited to basic information readily available at third party sources, but the main grievance is the overall design of the page and the inability to easily extract information.

6) Does management resist the institutional imperative?

We find no reason to conclude that Walgreen’s is not resisting this urge that so many other companies fall victim. Their company governance profile assures this assumption as it outlines several key issues that the investor could have issue with.

Financial and Value Review
Defensive:
1) Size of firm

With market capitalization above $2,000,000,000 it passes this test as Walgreen’s currently has a market cap of approximately 44 Bil.

2) Strong financial condition

With a current ratio of 1.86 it fails the test of a 2.00 current ratio or higher. This may question the financial strength of the company.

3) Earnings stability

Earnings have been positive over the past ten years for Walgreen’s, therefore, it passes the test of earning stability which enforces the depth of the company and the ability for continued positive performance.

4) Dividend record

The company has paid dividends consistently over the past ten years, which for the defensive investor is a guideline that a company must adhere to.

5) Price to earnings analysis

With a trailing P/E ratio of 23, the company falls short of the necessary guideline of a P/E ratio below 20.

6) Price to assets analysis

This ratio is above the benchmark of 50 which could be an indication of the stock being overpriced in relation to the company’s assets. In Walgreen’s defense, however, the company retains minimal working assets as they are turned on a regular basis. The fixed assets the company holds are a mixture of lease agreements (which cannot be classified as an asset) and property ownership of some of their store fronts.

Enterprising:
1) Strong financial condition

The enterprising investor only requires a current ratio of 1.5 or higher, therefore, Walgreen’s passes this test.

2) Earnings stability

The enterprising investor only requires positive net income for previous five years, and Walgreen’s passes this test.

3) Dividend record

The company currently pays a dividend, and the enterprising investor only requires a current payout of a dividend not a history of doing so as the defensive criteria requires.

4) Earnings growth

Earnings are greater than five years ago which passes the last test for the enterprising investor.

Valuation:
Based upon the above mentioned information, Walgreen’s passes the test for the enterprising investor and should be considered based upon that fact. However, the defensive investor would want to avoid the company, because it failed the testing criteria for this type of investor.

The valuation we have calculated for Walgreen’s finds that the next few years Walgreen’s shares should reach $78 per share. Return on common equity is determined to be 18% showing the attractive return the company is generating for their shareholders.
 

Opinion:
Based upon all of the information provided we find this company to be undervalued and consideration should be given. We find that the company is generating consistent returns on equity, dividends, and earnings over the past five to ten years. The company should continue to generate returns that meet or exceed current standards, and we are favorable for the long term prospects of the firm. We determine that the company will outperform the market in the future and we reaffirm our future price target of $78/share.

Neither of us held a position in Walgreen Co. at the time of publication.  Also, please read our disclaimer and Our Methods.

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