I'm reposting here Banker's message no 6831 from the CVS board. The original can be found here:
http://messages.yahoo.com/bbs?.mm=FN&action=m&board=7081591&tid=cvs&sid=7081591&
mid=6831
There are problems with the analysis, but it's a far cry better than anything the shorts and bears have posted here in a loooong time.
Re: Who's the amateur?
by: banker6796 08/20/02 10:13 am
Msg: 6831 of 6843
Look, I really don't expect many people to be able to grasp complex economic concepts, I understand that their bulb simply doesn't have enough wattage, if you know what I mean.
You have the same mind set of the investors who believed AMZN would be able to continue a 100% Q over Q sales growth and therefore was justified in having a larger market cap than WMT.
WAG is a wonderful company, well run, great balance sheet, etc. But it is overpriced. See if you can follow this:
For 2003 the company is projected to have sales of about $9MM per store.
The company has a current organic growth rate of about 12% which is imbedded in the valuation.
To sustain a 12% organic growth rate the average sales per existing store will have to grow to $23.2MM by 2011 (total sales of about $84B, up from $34B projected in 2003, from the existing store base).
The PE for the company is also imbedded with a greater than 20% growth rate. If you can make the leap that existing stores will be able to do $23MM in sales apiece in 8 years then that leaves a sales gap of $61.8B in order to maintain an overall growth rate of 20%. That means that in the next 8 years the company will have to build 2,666 stores (333 per year) that will be performing at the same $23MM per store level as the current base.
Okay, so can WAG do this? I think not. Why? I think a store with the footprint size of a typical WAG store can't support $23MM in sales. That's about the same sales volume as an 80,000 sf Walmart does today. Not to mention that drug costs can not continue to climb straight north, within the next five years Congress will do something to curb drug costs, this will cut SSS growth to something in the neighborhood of 5 to 6%. Also, even if they can achieve this sales level and do add an average of 333 stores per year the ones added in 2007 and 2008 will not be performing at full capacity which means they really need to add about 400 stores per year. While that is obtainable in the next few years you eventually start running out of prime locations to build in the markets you really want to be in. Then you are FORCED to build in less desirable locations, in less desirable markets in order to keep the growth numbers up. If you don't then the PE and stock price crumbles.
One question, if you guys feel WAG is so superior, why do you feel the need to even come to this board? It's almost like you have an inferiority complex and need to come here and try to validate yourself.
Banker
Banker
Posted as a reply to: Msg 6823 by wrteyt
I'm going to insult a few more people, then it's straight back to porn for me.
>>WAG is a wonderful company, well run, great balance sheet, etc. But it is overpriced. See if you can follow this:<<
OK. But before we get into this, your entire approach assumes that WAG�s current share price is based on the assumption that WAG�s historic growth rate (you say 20%) will continue for at least the next 9 years. What is that based on? I calculate that $1.00 EPS growing at 17% for 5 years, then 12% for 5 years, then 7% in perpetuity after that is worth $38.55 (12% discount rate). By contrast, if you assume 20% growth for 8 years (as you do), followed by 10% growth for 5 years, followed by 5% terminal growth, WAG would be worth $43.08. Quibble with those numbers if you like, but, in effect, you�re trying to prove that WAG is worth $43, not whether it is worth $37.
>>For 2003 the company is projected to have sales of about $9MM per store.<<
Not quite. You�re using 2003 projected revenues (33.9B) divided by the number of WAG stores in existence in May 2002 (3,766). So you have overestimated sales per store by not giving any credit for stores opened from June 1, 2002 through August 31, 2003. I think it would be more accurate to use 2002 projected revenue (28.2B) divided by 3,850 stores (WAG had 3818 stores open as of July 31, 2002 and was opening over 30 stores per month; the fiscal year ends August 31), which results in $7.32 million sales per store.
>>The company has a current organic growth rate of about 12% which is imbedded in the valuation.<<
The current SSS growth rate is more like 11%. SSS year to date (11 months) are up 10.7%. And I think it remains to be seen whether it is correct to assume that this amount of sales growth for 8 (or 9, in my case) years is already included in WAG�s price. But let�s go with 11% for now.
>>To sustain a 12% organic growth rate the average sales per existing store will have to grow to $23.2MM by 2011 (total sales of about $84B, up from $34B projected in 2003, from the existing store base).<<
Using my sales per store ($7.32 million) and 11% increases for 9 years, I get $18.49 million per store in 2011.
>>The PE for the company is also imbedded with a greater than 20% growth rate.<<
That�s an assumption that you haven�t proven. The historical (past 10 years) net income growth rate is closer to 17%, and you haven�t yet proven that WAG�s price assumes 20% or even 17% earnings growth.
>>If you can make the leap that existing stores will be able to do $23MM in sales apiece in 8 years then that leaves a sales gap of $61.8B in order to maintain an overall growth rate of 20%.<<
There are a lot of assumptions embedded in that. You are assuming that a 20% growth rate in gross sales is required to achieve a 20% increase in EPS. That assumes that margins and share count stay (approximately) the same as today. I�ll stick with those assumptions although there are factors that could cause margins to improve in the next decade (economies of scale, automation and other efficiency improvements, web site sales, increased use of generic prescriptions, the fact that approximately 15% of WAG�s current stores are less than 3 years old) and others that could cause margins to decline (prescription drug reform, prescriptions as a higher percentage of total store sales). But I�ll use a 17% growth rate for 9 years. That means by 2011, WAG should have $115.9B in sales (instead of your $145B).
>>That means that in the next 8 years the company will have to build 2,666 stores (333 per year) that will be performing at the same $23MM per store level as the current base.<<
From $115.8B in sales and $18.49 in sales per store, I get a total of 6,268 stores will be needed in 2011. That compares well with WAG�s well-known plan to have 6,000 stores by 2010. It will require 269 stores per year, which means that WAG shou
"I calculate that $1.00 EPS growing at 17% for 5 years, then 12% for 5 years, then 7% in perpetuity after that is worth $38.55 (12% discount rate). By contrast, if you assume 20% growth for 8 years (as you do), followed by 10% growth for 5 years, followed by 5% terminal growth, WAG would be worth $43.08. "
I don't know what discount rate you use to come up with the current worth.
But there is simple to check if you are getting adequate return from current price. If, as you do, one assumes WAG goes steady after 10 years, what would its P/E be then? A high quality 7% grower, maybe 20 (assuming equity market is normal at that time.)
On that basis, using your EPS growth assumption, buying at current price ($37), you achieve ANNUAL RETURN of 7.6% over the next 10 years.
In the second scenario: 5% steady grwoth after 13 years, one has this. A 5% quality steady grower maybe worth a PE of 16? (again normal market). On the EPS growth path of 20% for 8 years and 10% for 5 years, you achieve ANNUAL RETURN of 8.8% for the next 13 years.
By the way, those wouldn't be bad compound returns over those periods. But 1) it's probably less than many WAG holders hoped 2) this is under more or less a perfect scenario. It's a rare company indedd that can execute so perfectly and stay in a favourable operating environment for so long.
WAG might be that company. Who knows.
>>Okay, so can WAG do this? I think not. Why? I think a store with the footprint size of a typical WAG store can't support $23MM in sales. That's about the same sales volume as an 80,000 sf Walmart does today.<<
I�ll leave aside the fact that WMT�s inventory includes bulky items and much of WAG�s revenues come from small bottles that can sell for hundreds of dollars. WMT�s sales from its Wal-Mart segment was $139.1B last year on 355.1million sq. feet or $392 in sales per square foot. By comparison, in FY 2001, WAG had sales of $24.623B on 38.2 million square feet, or $645 in revenues per square foot. The average WAG store size was 10,852 square feet.
The newer stores tend to be larger (the average size of a new store opened in FY 2002 was 12,676 sq feet), so if we assume the average store size by 2011 will be 12,000 square feet, that means WAG will need $1541 in sales per square foot in 2011, which means that WAG will have to increase sales by 10.16% per square foot per year until 2011. Another way to look at it is this: adjusted for 5% annual inflation, $1541 in sales/sq ft is equivalent to $993 in sales/sq. ft. today.
Is that achievable? I�ll leave that to the retail experts to offer their opinions.
>>Not to mention that drug costs can not continue to climb straight north, within the next five years Congress will do something to curb drug costs, this will cut SSS growth to something in the neighborhood of 5 to 6%.<<
That�s a valid opinion, but it is only an opinion. If this is correct, of course, then the sales targets discussed above are unattainable.
>>Also, even if they can achieve this sales level and do add an average of 333 stores per year the ones added in 2007 and 2008 will not be performing at full capacity which means they really need to add about 400 stores per year.<<
Actually, this is not correct. You forget that the existing store base that you started with also included quite a few young stores. In fact, by 2011, the proportion of new stores in WAG�s system will actually be smaller than the proportion of new stores in WAG�s system today, which is one reason why WAG�s margins may be slightly better in 2011 than they are today.
>>While that is obtainable in the next few years you eventually start running out of prime locations to build in the markets you really want to be in. Then you are FORCED to build in less desirable locations, in less desirable markets in order to keep the growth numbers up. If you don't then the PE and stock price crumbles.<<
This raises the issue of market saturation. I don�t know when that will occur, but I do know that WAG has been very diligent in long range planning and I don�t think they came up with the 6,000 stores by 2010 goal without determining whether the market can support that many stores. At this point, I have to trust WAG�s management.
So what�s the conclusion? Well, to maintain the current earnings growth rate of 17%, WAG will need to stick to its goal of 6000 stores by 2010 and will need to increase sales/square foot by 10% per year.