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Drug Stores

Drug Stores

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Drug Stores

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  1. Drug Stores Trevor Yerrick Section 2

  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

  3. 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

  4. 2. Select Comparable Companies

  5. 3. Compute Market Multiples EPAT Multiple Enterprise Value = EPAT * EPAT Market Multiple Equity Value = Enterprise Value - NFL

  6. 3. Compute Market Multiples NI Multiple Equity Value = NI* NI Market Multiple

  7. 3. Compute Market Multiples Industry-Specific Multiple (Drug Sales) Equity Value = Drug Sales * Drug Sales Multiple

  8. 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)

  9. Adjusted Market Multiples EPAT Multiple Equity value per share: decreased by 40%

  10. Adjusted Market Multiples NI Multiple Equity value per share: decreased by 34%

  11. Adjusted Market Multiples Industry-Specific Multiple (Drug Sales) Equity value per share: increased by 36%

  12. 4. & 5. Compute Value Using Multiples • Combining Multiples (with and without ESRX) • Equity value per share

  13. 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

  14. 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

  15. Questions?