A Red Light for Walgreen
drugstore chain’s shares get downgraded due to significant integration
risk and increased management turnover, among other issues.
2014 6:29 a.m. ET
By Mizuho ($67.90, Dec. 10, 2014)
downgrading Walgreen to Neutral from Buy and cutting our price
target to $72 from $83.
limited meaningful upside to our fiscal 2015-2017 adjusted
earnings-per-share estimates. Walgreen (ticker: WAG) released an
updated proxy on Nov. 24 providing, for the first time, longer-term
(fiscal 2015-2018) pro forma adjusted EPS, earnings before interest,
taxes, depreciation and amortization (Ebitda) and revenue estimates
for the completion of Step 2 of the Alliance Boots transaction. We
think the longer-term goals in the proxy will be difficult to achieve
due to significant integration risk, increased international exposure
and limited near-term potential for improvement in base operating
trends given the increased management turnover.
completion of Step 2, we estimate Alliance Boots will account for
roughly 30%-35% of revenue and 27%-30% of Ebitda. The added
international exposure increases the risk profile for Walgreen given
growth and currency headwinds. Our stand-alone Alliance Boots
estimates assume mid-single digits Ebitda growth helped by continued
mergers and acquisitions (M&A). We think currency exposure could be a
source of near-term downside risk to fiscal 2016 adjusted EPS outlook
of $4.25-$4.60 and look for guidance on this issue when Walgreen
reports its fiscal first quarter on Dec. 23.
fiscal 2015-2016 adjusted EPS already assumes the deployment of the
majority of free cash flow, so any upside would come from additional
leverage. We estimate that the combined company will generate more
than $4 billion in free cash flow annually, but our estimates already
assume much of that deployment via share repurchases, limited debt
repayment and dividends over the next three years. Any M&A would
likely be Alliance Boots expanding its international footprint.
is trading at 15.2 times and 15.6 times our pro forma calendar and
fiscal 2016 adjusted EPS versus its ten-year forward price-to-earnings
(P/E) averages of 16.4 times and CVS Health’s (
CVS ) current 2016 P/E of 15.8 times. Our new price target is
based on a P/E of 16.4 times applied to our fiscal 2016 adjusted EPS
of $4.39. On a cash flow basis, our price target assumes a 5%
free-cash-flow yield on fiscal 2016 free cash flow.
-- Tim McDonough
companies mentioned in Hot Research are subjects of research reports
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