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WAG2006-9

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					September 14, 2006                                                                                                                                        Matthew McDonnell
Walgreen Co. (WAG)                                                                                                                                        mmcdnnll@uiuc.edu
Decision: Sell 50% of holdings (500 shares) as result of                                                                                                  Key Ratios and Statistics:
                                                                                                                                                          Symbol: WAG (NYSE)
perceived overvaluation                                                                                                                                   Bloomberg: WAG US
What’s changed                                                                                                                                            Industry: Retail
Valuation methodology
EPS forecasts 2006-2010                                                                                                                                   Share price= $49.31
Competitive environment                                                                                                                                   Intrinsic valuation= $25-$35
                                                                                                                                                          P/Ettm= 32.44
                                                                                                                                                          P/Eforward= 28.33
Conclusion: After modeling the firm via methods that examine economic effects                                                                             52-wk range: 39.55-51.60
of large off-balance sheet liabilities and thus raise investors’ required return
                                                                                                                                                          Current % of MV= 14.63%
(WACC), it was decided the firm shows significant downside risk that far
                                                                                                                                                          Gain= $24,310 (97.24%)
outweighs its limited upside potential. This downside potential is further                                                                                Post-sale % of MV= 7.89%
exacerbated by continuing increases in the firm’s competitive environment.
Holding limited amounts of the stock will allow for future analysis that will                                                                                     As stated If adjusted
provide 2 benefits: 1) an incentive for future analysis and repurchase in the event                                                                       Liquidity
of a price correction and 2) the potential to gain from the stock’s upward                                                                                Quick:     .61          .61
momentum caused by 3 consecutive quarters that exceeded analysts’ consensus.                                                                              Current: 1.86          1.86
                                                                                                                                                          Leverage:
What’s New: Again, the approach to modeling driving the above conclusion is                                                                               LTD/E= N/A             3.07
one that has not previously been used by RCMP analysts following the holding,                                                                             LTD/A= N/A              .67
                                                                                                                                                          A/E=        1.64       4.69
thus explaining why it contradicts previous bullish presentations on the holding.
                                                                                                                                                          Profitability:
I feel that the increase of WACC is not only warranted, but a necessary method                                                                            ROA=        10.68%
of valuing the firm in the absence of better expense data. In addition the CVS                                                                            3.74%
purchase of the Sav-On and Osco chains represents an increasing level of                                                                                  ROE=        17.54%
competition from WAG’s only true competitor.                                                                                                              17.54%
                                                                                                                                                          Op. Margin= 5.81% 5.81%
Negating Circumstances:                                                                                                                                   Prof. Margin= 3.70% 3.70%
1.     WAG once again beats consensus when it releases numbers for Q4 2006
2.     Failure on behalf of CVS to capitalize on its new business lines
3.     WAG entry into profitable service/product line well ahead of CVS
Figure 1: 5 yr stock performance vs S&P 500                      Figure 2: WAG, S&P, portfolio 7 yrs
                                                                                   Cumulative Performance

                                                                         100.00%

                                                                         80.00%

                                                                         60.00%
                                                     Percentage Change




                                                                         40.00%

                                                                         20.00%

                                                                          0.00%

                                                                         -20.00%

                                                                         -40.00%

                                                                         -60.00%
                                                                                            Oct. 1999 - Feb. 2006

                                                                                        Portfolio     S&P 500       WAG




Figure 3: Market weights before and after sale of 500 share of WAG
                                                                                                                    Post-Sale Market Value Distribution          AEE
                Current Market Value Distribution
                                                    AEE                                                                                                          AEOS
                                                    AEOS                                                     WAG, 8%                                             CPRT
                             AEE, 6%                CPRT                                               SRZ, 6%                  AEE, 7%                          FR
                WAG, 15%
                                                    FR                                              SRCL, 4%                                                     JKHY
             SRZ, 6%                   AEOS, 22%    JKHY                                                                                  AEOS, 23%              JPM
                                                                                              MVSN, 2%
           SRCL, 4%                                 JPM
                                                                                                     MS, 9%                                                      KMB
                                                    KMB
           MVSN, 1%                                                                                                                                              MS
                                                    MS                                              KMB , 6%
             MS, 8%                    CPRT, 9%                                                                                         CPRT, 9%                 MVSN
                                                    MVSN
                                   FR, 6%                                                                 JPM, 14%                   FR, 7%                      SRCL
             KMB , 6%                               SRCL
                                                                                                                                 JKHY, 5%                        SRZ
                  JPM, 13%      JKHY, 5%            SRZ
                                                                                                                                                                 WAG
                                                    WAG

				
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