nyse: wag april 29 th, 2014 leiyi (sally) huang qun (jett) yu siyang (sylvia) zhang
TRANSCRIPT
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NYSE: WAGApril 29th, 2014
Leiyi (Sally) Huang
Qun (Jett) Yu
Siyang (Sylvia) Zhang
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Agenda• Introduction • Business Overview• Stock Performance• Financial Ratio Analysis• Valuation • Recommendation
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Current Position• 500 shares bought on Oct 6, 1999 @ $25.00• Current Stock Price: $67.72 (April 25th 2014)• Last Action: Sold 200 out of 500 shares in our portfolio• Unrealized annual rate of return : 7.08%
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Company Overview
• Pharmacies & Drug Store • Market Capitalization:
$63.61 billion 63%10%
27%
Prescription Drugs
Non-Prescription Drugs
General Mechandise
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Industry Overview
• Major Players: CVS Caremark, Rite Aid Corp
• Macroeconomic Forces:Per capita disposable incomePopulation agingHealth care reformUnemployment rate
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
0
20000
40000
Per Capita Disposable Income
Year
1900 1920 1940 1960 1980 2000 2012 2020 2040 20600
20
40
60
80
100
3.1 4.9 9 16.625.5
3543.1
56
79.792
Number of Persons 65+ (in mil-lions)
Year (as of July 1)
Source from administration of aging, IBIS World Business
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Porter’s Five Forces
• Medium• Industry concentration raises barriers• Capital requirement is low
Threats of new entrants
• High• On the basis of price, selection, convenience and the quality of
customer services
Intensity of industry rivalry
• Low• General merchandise goods
Threats of Substitutes
• Medium• Supply agreement largely influence the profitability and
competitiveness of drug stores
Bargaining power of Suppliers
• High• Reimbursement rate by third parties
Bargaining power of Customers
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Strategic Alliance w. Alliance Boots
• Currently 45% ownership in Alliance BootsEntry and expansion to European MarketFull combination option available in 2015
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Strategic Alliance w. Amerisource Bergen
10-year pharmaceutical supply agreementAB act as the primary wholesale distribution source All the branded prescription drug and significant portion of
generic drug business transitioned to AB
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SWOT Analysis
• Pricing pressure from the Pharmacy Benefit Management side
• Uncertainty about economic conditions outside U.S
• Acquisitions on drugstore chains bring growth potentials
• International Expansion potentials
• High degree of operating leases
• Shortage of backup supply sources and self-contribution capacity
• Advantageous store locations
• Brand Recognition• Experienced staff• Well established
customer royalty program
Strengths Weaknesses
ThreatsOpportunities
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Stock Performance
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Ratio Analysis
2010 2011 2012 2013Current Ratio 1.60 1.52 1.23 1.34 Quick Ratio 0.61 0.53 0.43 0.57 Cash Ratio 0.25 0.19 0.15 0.24
2010 2011 2012 2013Operating Profit Margin 5.13% 6.05% 4.84% 5.46%Net Margin 3.10% 3.76% 2.97% 3.39%ROA 8.13% 10.10% 6.98% 7.11%ROE (Book Value) 14.53% 18.56% 12.86% 13.00%
2010 2011 2012 2013Debt/Assets 0.09 0.09 0.16 0.14 Debt/Equity 0.17 0.16 0.30 0.26 Interest Coverage 40.68 61.48 39.36 23.88
Liquidity Ratios
Profitability Ratios
Solvency Ratios
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Ratio Analysis2010 2011 2012 2013
A/R Turnover 27.26 29.18 30.72 30.10 Days Sales Outstanding 13.39 12.51 11.88 12.13 A/P Turnover 10.89 11.00 11.16 11.33 Days Payable Outstanding 33.50 33.17 32.71 32.21 Fixed Asset Turnover 6.13 6.36 6.08 5.97 Total Asset Turnover 2.62 2.69 2.35 2.09
2010 2011 2012 2013Tax Burden 61.99% 63.20% 63.00% 62.90%Interest Burden 97.54% 98.37% 97.46% 98.86%Operating Profit Margin 5.13% 6.05% 4.84% 5.46%Asset Turnover 2.62 2.69 2.35 2.09 Leverage 1.79 1.84 1.84 1.83 ROE 14.53% 18.56% 12.86% 13.00%
Activity Ratios
DuPont Analysis
2011 2012 2013EBIT/Tangible Asset 18.48% 15.37% 16.60%EBIT/EV 10.88% 11.50% 7.96%
Greenblatt Analysis
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Comparable Companies
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Comparable Company Analysis
Multiple Weight
Implied WAG Stock Price
Price/Book Value 25% 66.07$ Forward TEV/Sales 25% 70.17$ Forward TEV/EBITDA 25% 46.76$ Forward P/E 25% 61.84$
Implied WAG Stock Price 61.21$
Multiple WAG Statistic Low Median High Mean Low Median High MeanPrice/Book Value 21.78$ 1.70x 2.30x 5.10x 3.03x 37.03$ 50.09$ 111.08$ 66.07$ Forward TEV/Sales 74,383.51$ 0.47x 0.66x 1.81x 0.90x 33.83$ 51.18$ 141.41$ 70.17$ Forward TEV/EBITDA 5,022.79$ 8.46x 8.98x 9.12x 8.88x 41.44$ 47.26$ 48.01$ 46.76$ Forward P/E 3.70$ 13.83x 17.21x 18.61x 16.71x 51.19$ 63.67$ 68.84$ 61.84$
Multiple Statistics Implied WAG Share Price
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WACC Calculation
Cost of debtCost of debt 2.7%Marginal tax rate 37.5%
Cost of debt after tax shield 1.7%
Cost of equityRisk-Free Rate (rf) 2.7%Market Risk Premium (rm-rf) 7.0%CAPM 5 year Beta 0.74
CAPM Cost of Equity 7.9% WAG Realized Return 26.5% Cost of Equity 9.7%
Capital Structure Debt 7.4% Market Cap 92.6% Total 100.0%
Weighted average cost of capital 9.1%Business risk premium 1.0%
Discount Rate 10.1%
WACC
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Discounted Cash Flow Analysis
FCF Build - WAG +45% Alliance Boots 2014 2015 2016 2017 2018Net Income 2982.0 3239.8 3505.1 3862.6 4233.0Less: Capex (1,400.0) (1,212.4) (1,442.8) (1,500.5) (1,560.5)
Less: Change in NWC (212.1) (354.3) (270.8) (227.4) (236.5) Plus: D&A 1,293.7 1,305.0 1,295.1 1,310.9 1,331.1
Unleveled FCF $2663.6 $2978.1 $3086.7 $3445.5 $3767.0
FCF Build - WAG + 100% Alliance Boots 2014 2015 2016 2017 2018Net Income 2982.0 3934.7 4283.1 4675.1 5067.8
Less: Capex (1,400.00) (1,700.00) (2,000.00) (1,500.47) (1,560.49) Less: Change in NWC (212.11) (354.28) (270.77) (227.45) (236.54)
Plus: D&A 1,293.66 1,304.99 1,295.12 1,310.86 1,331.07 Unleveled FCF $2663.6 $3185.4 $3307.4 $4258.0 $4601.9
2009A 2010A 2011A 2012A 2013A 2014P 2015P 2016P 2017P 2018PSales Growth % 6.4% 7.1% -0.8% 0.8% 4.6% 7.0% 5.0% 4.0% 4.0%Gross Margin % 27.8% 28.1% 28.4% 28.4% 29.2% 28.5% 28.4% 29.2% 29.3% 29.5%SG&A Margin (%) 22.7% 23.0% 22.9% 23.6% 24.3% 23.2% 23.0% 23.5% 23.2% 23.0%Capex 1,927.0 1,014.0 1,213.0 1,550.0 1,212.0 1,400.0 1,212.4 1,442.8 1,500.5 1,560.5 Change in NWC ($) - 266.0 488.0 (912.0) 30.0 212.1 354.3 270.8 227.4 236.5 D&A ($) 975.0 1,030.0 1,086.0 1,166.0 1,283.0 1,293.7 1,305.0 1,295.1 1,310.9 1,331.1 Tax Rate 36.6% 38.0% 36.8% 37.0% 37.1% 37.1% 37.1% 37.5% 37.5% 37.5%
Years Ended August 31 Forecast
Assumption
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Discounted Cash Flow Analysis
PV of Terminal Enterprise Net Equity Shares $ /FCFs Value Value Debt Value outstanding Share
Option not exercised 11846.6 33478.3 45325.0 6024.6 39300.4 954.331 41.18
Option exercised 13249.5 40898.0 54147.5 10796.6 43350.9 954.331 45.43
Present Value of Cash FlowsPerpetuity Growth Rate 3.0%
Option not exercised 2,663.6 2,978.1 3,086.7 3,445.5 3,767.0 54,281.0 Option exercised 2,663.6 3,185.4 3,307.4 4,258.0 4,601.9 66,311.0
Discounted rate 10.15% 10.15% 10.15% 10.15% 10.15% 10.15%
Discounted period (t) 1.00 2.00 3.00 4.00 5.00 5.00
Discount Factor 0.91 0.82 0.75 0.68 0.62 0.62
PV of FCFs
Option not exercised 2,418.2 2,454.6 2,309.8 2,340.7 2,323.3 33,478.3
% of EV 5.3% 5.4% 5.1% 5.2% 5.1% 73.9%
Option exercised 2,418.2 2,625.5 2,474.9 2,892.7 2,838.3 40,898.0
% of EV 4.5% 4.8% 4.6% 5.3% 5.2% 75.5%
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Sensitivity Table
Option not exercised41.18 2.0% 2.5% 3.0% 3.5% 4.0%
8% 51.07 55.22 60.18 66.21 73.709% 42.80 45.73 49.13 53.14 57.92
10% 36.58 38.73 41.18 44.00 47.2811% 31.72 33.35 35.19 37.26 39.6312% 27.82 29.10 30.51 32.09 33.86
Option exercised45.43 2.0% 2.5% 3.0% 3.5% 4.0%
8% 57.46 62.53 68.60 75.96 85.109% 47.39 50.96 55.12 60.01 65.85
10% 39.80 42.43 45.43 48.87 52.8811% 33.89 35.88 38.12 40.66 43.5512% 29.15 30.70 32.43 34.36 36.52
Perpetuity Growth Rate
Discounted rate
Perpetuity Growth Rate
Discounted rate
Sensitivity Analysis
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Implied Price
DCF $ 41.18 50%
Comparable Analysis $ 61.21 50%
Implied Price $ 51.20 100%
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Recommendation
• Sell 200 shares at market• 500 shares bought on Oct 6, 1999 @ $25.00• Current Stock Price: $67.72 (April 25th 2014)
• Gain: $8544
Sell