Walgreens Boots Alliance

I am looking at Walgreens Boots Alliance (WBA), and it seems interesting.

Investment Thesis

  • WBA is a large ($125B sales), growing (5-10%), and reasonably profitable company (ROE: 10-15%).
  • financially and operationally conservative: Its current (debt + liabilities)/EBITDA = 1.5 – 2.5x, depending on how you deal with leases. It pays a consistently growing dividend.
  • operationally conservative: It has avoided the acquisitive path of CVS (where debt/EBITDA is closer to 4-5x), choosing instead, to partner and collaborate. This strategy may attract “partners” wary of the CVS’s ecosystem.
  • horizontal and vertical integration: Consolidation is underway in the industry. WBA is iterative, and works in small steps. It bought a slice of Rite Aid stores, and a quarter of drug distributor Amerisource Bergen. In 2014, Walgreens bought Boots Alliance, which brought in a new CEO.
  • owner operator: CEO Pessina is a well regarded operator, with skin in the game. He bought a chunk when share price was in the $80s.
  • recession resistant, WBA was cash flow positive through the Great recession; plus their balance sheet is conservative.
  • risks are regulatory (can adapt), and Amazon (probably overblown given the complexity and low margins)

Quick Valuation

FCF/sales is steady and approximately 4%. Over periods of time, FCF exceeds net income by about 25%. This is especially so, if you normalize recent flurry of M&A.

Using a growth rate of 5%, discount rate of 12% and FCF of $6-6.5 gives a value of $90-$100/share using a terminal growth model.

It is cheap relative to its past P/S: 0.5 (historical 0.75), EV/EBIT 13.5 (historical 16.5), P/E 16.5 (historical 20). If they mean revert, they all imply a target price close to $100.

Tidbits

  • Comparison with other retailers: Walmart – $505B, Amazon – $193B, Costco – $140B, CVS – $185B, TGT – $72B.
  • Sales growth at Walmart and Target has trickled down to the 0-2% range, while that at CVS and WBA has been steady in the high single to low teens.
  • Rewards Program has about 90M members. This is valuable data.
  • Founded in 1909, invented milkshakes, and popularized soda fountains in the middle of the store.

Resources

  • RGA Investment Advisors slide deck on WBA, and Elliot Turner‘s twitter posts, were helpful in understanding the game WBA is choosing to play, compared to CVS.

 

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