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Drug Stores. Trevor Yerrick Section 2. Quick Background. Drug Store Industry Traditional vs. In-store Pharmacy Benefit Managers (PBMs) “Nation’s largest drugstore chain” 8,582 locations, including 8,116 drug stores 2013: $72.2 B in sales, $45.5 B in prescription sales
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Drug Stores Trevor Yerrick Section 2
Quick Background • Drug Store Industry • Traditional vs. In-store • Pharmacy Benefit Managers (PBMs) • “Nation’s largest drugstore chain” • 8,582 locations, including 8,116 drug stores • 2013: $72.2 B in sales, $45.5 B in prescription sales • Recent trend of expansion through acquisitions • Alliance Boots (45%) acquisition in 2012, option to purchase remaining 55% in 2015
Steps to Using Multiples • 1. Select summary performance measure to use as basis for valuation • No single right measure • EPAT, NI, and Drug Sales (industry-specific multiple) chosen as performance measures • Tough to determine – no two firms are in exactly the same business • Easiest numbers to grasp
3. Compute Market Multiples EPAT Multiple Enterprise Value = EPAT * EPAT Market Multiple Equity Value = Enterprise Value - NFL
3. Compute Market Multiples NI Multiple Equity Value = NI* NI Market Multiple
3. Compute Market Multiples Industry-Specific Multiple (Drug Sales) Equity Value = Drug Sales * Drug Sales Multiple
Adjustments of Comparables • No pure competitors in the industry • Walgreens = only drug store chain • CVS Caremark = drug store chain and PBM • Express Scripts = only PBM • Wal-Mart = over-aggregated, too large • Best option = remove Express Scripts from analysis • CVS and Wal-Mart have retail pharmacies (WAG’s core business)
Adjusted Market Multiples EPAT Multiple Equity value per share: decreased by 40%
Adjusted Market Multiples NI Multiple Equity value per share: decreased by 34%
Adjusted Market Multiples Industry-Specific Multiple (Drug Sales) Equity value per share: increased by 36%
4. & 5. Compute Value Using Multiples • Combining Multiples (with and without ESRX) • Equity value per share
Recommendation for Investors • Based on this analysis… BUY • The closing price on 1/23/14 = $58.35 • Significantly undervalued compared to the averages of the market multiples • With ESRX included: $80.88 • Without ESRX: $76.82
Confidence in Multiples Method Valuation • Not very high…. for a number of reasons • Theoretically difficult • Assume comparable companies are accurately valued, but Walgreens is not • No perfect competitor for Walgreens in the industry • Difficult to determine which comparable companies to include/exclude from multiples analysis • 2013 figures vs. 2012 data of comparable firms • Could benefit from NEA multiple and other multiples utilizing enterprise value • Prevents leverage from affecting the valuation estimates