We’re posting up notes from the 2018 London Value Investor Conference. Next up is Stephen Mitchell and Bryan Pilsworth of Foyston, Gordon & Payne who pitched two longs: Transcontinental (TSE:TCL) and Walgreens Boots Alliance (NASDAQ:WBA).
Stephen Mitchell & Bryan Pilsworth’s London Value Investor Conference Presentation
Long: Walgreen Boots Alliance (NASDAQ: WBA): The shares are cheap because it’s rumoured that Amazon is going to enter the pharmacy business. 70% of prescriptions are recurring. 85% of prescriptions are generic. People with recurring prescriptions may chose Amazon home delivery. Pharmacies may lose foot traffic which will impact brick and mortar store sales.
Walgreens is the largest retail pharmacy, health and daily living destination across the US and Europe. Market Cap $63bn. Global sales of $118bn, over 13,200 stores in 11 countries. Over the last 10 years, sales and EPS growth of 8%. Average ROE of 16%. Two reasons why pharmacy/ store networks have a moat against Amazon. 1. Convenience: 70% of seniors chose pharmacy over mail order due to convenience. 2. Compliance: Managed Care Operators (MCOs) need pharmacies to ensure proper patient drug usage. So far chains have taken share at the expense of mail order and independents.
High margin beauty products provide an opportunity to improve front-of-store sales and expand margins. Customers like in-store demonstrations before purchase. On-line sales are only 8% but growing. Walgreens already has an omni-channel offering – a multi-channel sales approach – and a mobile offering. The mobile channel has 88m users in the US. Half of digital sales come through mobile. 50% of users use an app in-store. 20% of users are 55 years or older. PE 10.3x CY 2018; ROE 19.8% CY 2018; Net debt / EBITDA 1.5x; dividend yield 2.5%.
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