Walgreens Boots Alliance
(NYSE: WBA)
Hold
Analysts:
David Lee
Ningzhou Fang
Date:
Reviewed: October 25, 2016
Updated: November 17, 2016
Current Price:
$83.99
(As of 11/17/2016)
Target Prices:
$81.09-$82.71
Comparable Company Analysis
$86.24
DCF Analysis
RCMP-Fall-2016
University of Illinois
At Urbana-Champaign
Business Summary
With continued industry consolidation, Walgreens acquires Alliance Boots in 2014 expanding its operations further to multinational regions. Increased earnings and business combination drive the company’s growth with additional opportunities through inorganic growth from its pending merger with Rite Aid to carry its momentum through 2017. Underlying threats include divestiture of carrying pharmacy retail stores and management of international operations.
Key External Drivers
We determine four key economic drivers for companies in pharmacy industry. First, the number of people aged over 65 is expected to keep growing at an annualized rate of 3%; Second, the federal funding for Medicare is expected to grow at an annualized rate of 6.2%, reaching a trillion dollars by 2018; Third, the increasing elderly populationwill most likely drive the growth of physician visits; Fourth, the number of people with private health insurance is expected a sluggishincrease over the next five years, rising at an annualized rate of 0.5% to 200 million.
Financial Analysis
In our financial analysis, we follow Walgreens Boots Alliance through its merger and acquisition activity with AmerisourceBergen in 2013 and Alliance Boots in 2014-2015. We observe increase in asset intensity as SG&A costs significantly increase in 2014-2015, restricting operating and profit margins. However, liquidity within the firm continues to increase with steady recovery of the firm’s asset turnover and interest coverage ratios from 2015 moving forward. Due to the firm’s ability to increase its earnings complementary to its growth in tangible assets, we believe the firm will further increase its trading price through earnings in addition to its pending merger with Rite Aid schedules to close in January 2017.
Projection and Valuation
We applied the DCF valuation with the assumptions that the revenue of US retail pharmacy will grow at annualized rate of 6% in the next two years due to the instruction of new US loyalty program and will decline to 3% since the fierce competition in the industry; the revenue of international retail pharmacy will grow at annualized rate of 8% in the next five years due to the dropping British pound and the expected funding cutting program in UK; the revenue of pharmaceutical wholesale will grow at annualized rate of 10% consistent with the forecasted global pharmaceutical industry. We get the implied share price of $86.24 using the adjusted WACC of 10.5% as the discount rate. We use four comparable companies with similar business model of WBA whereas weighted average of mean and medium LTM P/E, TEV/EBIT, TEV/EBITDA and TEV/Sales to draw the implied share price of $81.09-$82.71.
Recommendation
We rate WBA shares as HOLD as a result of current price is fairly valued. However, we should notice that the company is approaching its current business cycle and its asset intensity poses financial risk for business. Inorganic growth through M&A is uncertainmajority of growth opportunities overseas.