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Walgreen Co (NYSE:WAG)
Intrinsic Value (DCF)
\$82.30 (As of Today)

As of today, Walgreen Co's intrinsic value calculated from the Discounted Cash Flow model is \$82.30.

Margin of Safety (DCF) using Discounted Cash Flow model for Walgreen Co is 16.78%.

Definition

This is the intrinsic value calculated from the Discounted Cash Flow model with default parameters. In a discounted cash flow model, the future cash flow is estimated based on a cash flow growth rate and a discount rate. The cash flow of the future is discounted to its current value at the discount rate. All of the discounted future cash flow is added together to get the current intrinsic value of the company.

Usually a two-stage model is used when calculating a stocks intrinsic value using a discounted cash flow model. The first stage is called the growth stage; the second is called the terminal stage. In the growth stage the company grows at a faster rate. Because it cannot grow at that rate forever, a lower rate is used for the terminal stage.

GuruFocus DCF calculator is a two-stage model. The default values are defined as:

1. Discount Rate: d=12%

2. Growth Rate in the growth stage: g1=20%.
Growth Rate in the growth stage = average cash flow per share growth rate in the past 10 years or 20%, whichever is less => Average Cash Flow Per Share Growth Rate in the past 10 years was 20% which is NO less than 20% => Growth Rate: 20%

4. Terminal Growth Rate: g2=4%

3. Years of Growth Stage: y1=10

5. Years of Terminal Growth: y2=10

6. Free Cash Flow Per Share (TTM): fcf=\$2.89.
However, GuruFocus DCF calculator is actually a Discounted Earnings calculator, the earnings per share is used as the default. The reason we are doing this is we found that historically stock prices are more correlated with earnings than free cash flow.

All of the default settings can be changed and the results are calculated automatically.

Walgreen Co's Intrinsic Value (DCF) for today is calculated as

 DCF = fcf * {[(1+g1)/(1+d) + (1+g1)^2/(1+d)^2 + ... + (1+g1)^10/(1+d)^10] + (1+g1)^10/(1+d)^10 * [(1+g2)/(1+d) + (1+g2)^2/(1+d)^2 + ... + (1+g2)^10/(1+d)^10]}

set x = (1+g1)/(1+d) = (1+0.2)/(1+0.12) = 1.07142857143
and y = (1+g2)/(1+d) = (1+0.04)/(1+0.12) = 0.928571428571

 DCF = fcf * {[x + x^2 + ... + x^10] + x^10 * [y + y^2 + ... + y^10]} = fcf * [x * (1-x^10) / (1-x) + x^10 * y * (1-y^10) / (1-y)] = 2.89 * 28.4682982707 = 82.27

 Margin of Safety (DCF) = (Intrinsic Value (DCF) - Current Price) / Intrinsic Value (DCF) = (82.27 - 68.47) / 82.27 = 16.78 %

* All numbers are in millions except for per share data and ratio. All numbers are in their own currency.

Explanation

Unlike valuation methods such as Net Current Asset Value, Tangible Book Value per Share, Graham Number, Median Ratio etc, discounted Cash Flow model evaluates the companies based on their future earnings power instead of their assets.

Be Aware

A larger margin of safety should be required for companies with less predictable businesses.

You can screen stocks that trade below their intrinsic value (DCF) and Intrinsic Value (Discounted What you need to know about the DCF model:

1. The DCF model evaluates a company based on its future earnings power
2. Growth is taken into account; therefore a faster growth company is worth more if everything else is the same.
3. Since we are projecting future growth, it is assumed that the company will grow at the same rate as it did during the past 10 years. Therefore this model works better for the companies that have relatively consistent performance.
4. The DCF model works poorly for inconsistent performers such as cyclicals.
5. What discount rate should you use? Your expected return from the investment is a good discount rate assumption.
6. Earnings) with the GuruFocus All-in-One Screener. Companies with a high Predictability Rank that trade at a discount from their Intrinsic Value (DCF) and Intrinsic Value (Discounted Earnings) can be found in the screen of Undervalue Predictable Companies.

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