Abstract

This is a financial case that evaluates different ratios and assumptions to forecast the income statement and balance sheet of Walgreens Boots Alliance Inc. These statements would be used in the projection of the stock prices for the company and the emerging issues associated with the common stock. This case will use the simple forecasting technique for the stock price. The analysis will be based on the relationship that exists between the income statements and the balance sheet. The Walgreens case will illustrate the techniques used in the forecasting of an income statement and a balance sheet. In this case the P/E ratio and the confidence interval was used for the projection of the income statement and the balance sheet.

Walgreens Boots Alliance Inc.

The Walgreens Boots Alliance Inc. is a Delaware Corporation, and the company is the first global, pharmacy-led health and wellbeing enterprise (Brigham, Eugene & Houston, 2010). The company has sales of $117.4 billion in the fiscal ended August 31, 2016. The key objective of the organization is to help people across the world to lead a healthier and happier life.

WBA is the largest retail pharmacy, health and daily living destination in both the US and Europe (Security and Exchange Commission, 2016). Walgreens and the other companies that have equity method investment can boast of presence in more than 25 countries with a workforce of 400000 people (Brigham, Eugene & Houston, 2010). It is a global leader in the pharmacy-led, health and wellbeing retail therefore combined with its partner the company has over 13200 stores in 11 countries. Walgreens also has one of the largest global pharmaceutical wholes and distribution network. The company has more than 390 distribution centers that serve more than 230000 pharmacies, health centers, clinics and doctors in more than 20 countries. The company is also a leading consumer of prescription drugs and other health and wellbeing products.

The Walgreens Boots Alliance Inc. has the following portfolio of brands Walgreens, Boots, Duane Reade and Alliance Healthcare. Additionally, the company maintains increasingly global health and beauty products such as Liz Earle, Soap and Glory, Botanics and No 7 (Security and Exchange Commission, 2016). The global brands in the company are boosted by the company’s possession of in-house research and development as well as manufacturing capabilities. The R&D department allows the company to attain its goal of further driving innovative ways to address global health and wellness obstacles that exist currently. The company intends to expand their customer offering in the existing markets and also venture into the emerging markets so as to be a health and wellbeing partner of choice (Brigham, Eugene & Houston, 2010).

Walgreens Boots Alliance was incorporated in Delaware in 2014 as a successor to the Walgreens Co. which was an Illinois corporation. Walgreens Co. was formed in 1909 from a business that was formed in 1901. The headquarters of the Walgreens Boots Alliance are located at 108 Wilmot Road, Deerfield, Illinois 60015 (Security and Exchange Commission, 2016). The common stock of the company trades on the NASDAQ Stock Markets.

Recent transactions

The company exercised warrants to purchase 22,696,912 shares of AmerisourceBergen Corporation at an exercise price of $51.50 per share that aggregated to an exercise price payment of $1.17 billion. On August 25, 2016, the company exercised additional warrant to purchase 22,696912 shares of AmerisourceBergen Corporation at $52.50 per share for a price of $1.19 billion. As of August 31, 2016, the company owned 56854867 of AmerisourceBergen Corporation common stock that was approximately 24% of the outstanding common stock. The company was given a board seat on AmerisourceBergen board of directors. The company also intends to acquire additional 8398752 AmerisourceBergen shares in the common market so as to obtain another seat on the board.

Pending transactions

The company entered into an agreement and plan of merger with Rite Aid Corporation and Victoria Merger Sub Inc. – this is a wholly owned subsidiary of the corporation pursuant to which the company agreed to acquire Rite Aid. Rite Aid is a drug store chain in the United States with 4550 stores located in 31 states and British Columbia as of August 27, 2016. Rite Aid Stockholders approved this merger in February 2016. This transaction will be concluded in early 2017. The main obstacle is the regulatory approvals and other customary closing conditions.

Industry overview

The pharmaceutical industry both the retail pharmacies and the pharmaceutical wholesales has been identified as a very competitive market with numerous consolidations recently. The prescription drugs market has played a key role in the healthcare and constitutes a key line in treatment of numerous medical conditions. The future of the prescription market is continuously becoming strong with the aging populace, increase in generic drugs and increase in life expectancy. The pharmaceutical wholesalers bridge the gap between the manufacturers and the pharmacies and healthcare providers through supplying them with the drugs.

Forecasting

Current market price of the Walgreen Boot Alliance Inc. (WBA) is at $70.50.

Days Sales Outstanding (DSO) can be computed as the Account receivables/Daily sales. Then the projected account receivables/sales can be generated as

 

The projected Income Statements and balance sheet for the current year and the upcoming three years can be computed by getting the following averages

Sales for the three years will be

 

Operating cost including the Depreciation will be

Earnings before interest and Taxes

Cash

Cash will grow at the same rate as the sales

Account Receivables AR

This account will be based on the project AR/sales ratio of  then will be computed as follows

Inventories

The inventory is projected to be 8899/118214 or 7.53% of sales

Fixed Asset (FA)

Based on the assumption the fixed assets of WBA will increase at the same rate as the sales

Total Asset

Projected total asset

Total Liabilities

Comparing the assets and the liabilities we desire to have the liabilities/Assets target ratio of 30% then

Total Common Equity (E)

Assuming that WBA has not issued preferred stock then the Total Equity (E) will be

Payables + Accruals

The payables and the accruals will grow in the proportion of the of sales

Interest-Bearing Debts (IBD)

This can be computed by subtracting the payables + accruals from the liabilities

Interest Expense (IE)

The interest is assumed to be 10% of the Interest-Bearing Debts (IBD) therefore will be calculated as

Earnings before Taxes (EBT)

Taxes

40% of the EBT

Net Income

The Net income will be computed as

Projected Income Statement and Balance Sheet

 

Year 0
Year 1
Year 2
Year 3
Year 4

Income Statement

Revenue

$200.0
$250.0
$300.0
$400.0

Cost of Goods Sold

150.0
170.0
214.0
275.0

Gross Profit

$50.0
$80.0
$86.0
$125.0

Operating Expenses

Salaries

$20.0
$20.0
$40.0
$40.0

Rent

24.0
24.0
24.0
24.0

Utilities

5.8
5.8
5.9
6.0

Depreciation

50.0
50.0
50.0
50.0

Total

$99.8
$99.8
$119.9
$120.0

Operating Income

($49.8)
($19.8)
($33.9)
$5.0

Other Expense / Income

Interest Expense (8%)

($16.0)
($16.0)
($16.0)
($16.0)

Interest Income (1%)

1.7
2.4
2.2
2.1

Total Other Income

($14.3)
($13.6)
($13.8)
($13.9)

Income before taxes

($64.1)
($33.4)
($47.7)
($8.9)

Taxes (35%)

0
0
0
0

Net Income

($64.1)
($33.4)
($47.7)
($8.9)

EBITDA

$0.2
$30.2
$16.1
$55.0

Balance Sheet

Current Assets

Cash

$170.9
$235.5
$219.8
$210.9

Account Receivable

75.0
54.0
65.0
90.0

Inventory

20.0
21.0
35.0
40.0

Prepaid Expenses

25.0
34.0
50.0
65.0

Total Current Assets

$290.9
$344.5
$369.8
$405.9

Long Term Assets

Plant, Property & Equipment, Gross
$250
$250
$250
$250

Accumulated Depreciation
50.0
100.0
150.0
200.0

Plant, Property & Equipment, Net
200.0
150.0
100.0
50.0

Total Long Term Assets

$200.0
$150.0
$100.0
$50.0

Total Assets

$490.9
$494.5
$469.8
$455.9

Current Liabilities

Account Payable

$30.0
$58.0
$65.0
$45.0

Accrued Expenses

25.0
34.0
50.0
65.0

Total Current Liabilities

$55.0
$92.0
$115.0
$110.0

Long Term Liabilities

Long Term Debt

200.0
200.0
200.0
200.0

Total Long Term Liabilities

$200.0
$200.0
$200.0
$200.0

Total Liabilities

$255.0
$292.0
$315.0
$310.0

Shareholder’s Equity

Common Equity

$300.0
$300.0
$300.0
$300.0

Retained Earnings

(64.1)
(97.5)
(145.2)
(154.1)

Total Shareholder’s Equity

$235.9
$202.5
$154.8
$145.9

Check

0.0
0.0
0.0
0.0

Cash Flow

Cash Flow from Operations

Net Income

($64.1)
($33.4)
($47.7)
($8.9)

Less: Deprecation

50.0
50.0
50.0
50.0

Account Receivable

(75.0)
21.0
(11.0)
(25.0)

Inventory

(20.0)
(1.0)
(14.0)
(5.0)

Prepaid Expenses

(25.0)
(9.0)
(16.0)
(15.0)

Account Payable

30.0
28.0
7.0
(20.0)

Accrued Expenses

25.0
9.0
16.0
15.0

Cash Flow from Operations
($79.1)
$64.6
($15.7)
($8.9)

Cash Flow from Investing

Plant, Property & Equipment, Gross
($250)
$0
$0
$0

Cash Flow from Investing

Cash Flow from Financing

Long Term Debt

$200.0
$0.0
$0.0
$0.0

Common Equity

300.0
0.0
0.0
0.0

Cash Flow from Financing

$500.0
$0.0
$0.0
$0.0

Cash Beginning

$0.0
$170.9
$235.5
$219.8

Net Cash Change

170.9
64.6
(15.7)
(8.9)

Ending Cash

0
$170.9
$235.5
$219.8
$210.9

 

Discussion

The forecasting was based on assumptions. All the assumptions are related to the financial statements. The assumptions are made between the end of the income statement and the beginning of the balance sheet. This will ease the process of making changes to the assumptions without jumping between the places.

The average growth arte for the three year for revenue was calculated to be 20.16%. Therefore it was reasonable to assume that the growth rate will be close to this value for the next three years. The COGS was computed as a proportion revenues therefore for the three years it was wise to the average of the past three years without the discount adjustment. Other assumptions that were considered was salaries would not change within the period, rent and utilities will also remain the same while depreciation would be associated with the assets. Taxes were only charged when the company makes profits.

Reference

Brigham, Eugene F and Joel F. Houston, (2010), Fundamentals of Financial Management, 6th Edition, CENGAGE Learning, Southern- Western.

Security and Exchange Commission, U. S. (2016). Walgreens Boots Alliance Inc. Washington: Security and Exchange Commission.

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