WAG vs CVS

Day 2

I spent day 1 of this study looking at the potential sales growth for these companies. Both have had steady but declining growth of sales. In preparing the SSG for these Co.s I have used lower future sales growth.  Today we will look at potential Earnings growth.

Many BI investors use earnings growth rates that are the same as sales. I usually do the Preferred Procedure especially if there are changes in the Co. margins, taxes or number of shares outstanding. (These are often described in the 10Q under management discussion.) If I see the sales and earnings trend lines parallel on the front of the SSG, I will consider using similar growth for each. Online Take Stock offers similar comparisons. The TSSW front page shows future EPS based on sales growth as well as from a business model.  PERT graphics also will show if the trend lines for sales and earnings are growing in tandem.

Sales and Earnings growth for WAG have been trending upward in a near parallel fashion for the past 10 years. This is evident from the front page of the SSG as well as the trend graph and PERT graphics. (see slide 1) This parallel trending has changed in the past 1 year. I need to look into that and use the preferred procedure to get another opinion (hopefully more accurate) on future earnings growth. If you feel that over the long term, sales and earnings will continue to rise in a parallel fashion, using 7.3% would be reasonable and EPS in 5 years would =$3.09.

Using the Preferred procedure for WAG I can add some judgment on the variables affecting earnings. Comparing computer generated trends with data from VL, Reuters or other sources, I can get  more assurance that my numbers are good.

Future tax rate for WAG is predicted by VL to be 37% which is slightly higher than the computer generated rate using SA. Also, the total number of shares for the Co. 3- 5 years into the future is predicted to be 975M by VL. This is a lower number of shares than what is generated by the SA program. However, the # of shares outstanding for WAG has been trending downward since 2005, and management has stated that they intend to continue buying shares in the future.

Pre-Tax Profit Margins (PTM) is another variable you can look at and compare with VL. VL predicts net profit margins to be 4% in the future. (That is an after tax margin.) By putting the tax back into that margin, we can get what VL believes the pre tax margin will be in the future. The calculation is 4%/(1-.37)=6.3%. So based on VL data, the future PTM is 6.3%. That compares to the computer generated 5 year average of 5.8%. The difference may be due to VL’s recognition that the Co. will be selling more generic medications with higher margins.

My SSG predicts EPS growth of 7.8% per year, with Estimated High EPS of $3.15. (see slide 2) This compares to an Estimated High EPS of $3.25 in 4 years from VL. Because WAG reported EPS of $2.17 at the end of fiscal year 2008, VL predicts EPS growth of 10.6%. (see slide 3) The Estimated High EPS derived with the preferred procedure using VL data (Sales growth of 7.9%, PTM of 6.3%, # shares 975M and tax rate of 37%) is $3.51 in 5 years for an annual growth rate of  10.1%. (see slide 4) Finally, the Annual Rates box on the left side of the VL report shows future EPS growth of 12%.

The Analyst Consensus Estimate for the next 5 years is 11.3% to 15% growth annually.

Another “opinion” for future EPS growth can be found at the Online Take Stock site. The Front page TSSW form shows estimated sales and earnings growth. There are 2 judgments in this section. EPS growth based on future sales for WAG is 6.8%. Beginning with EPS of $2.17 at the end of FY 2008, growth of 6.8% a year will give EPS of $3.01in 5 years. EPS growth based on the business model for WAG is 9.7%. Beginning with EPS of $2.17, EPS will be $3.45 in 5 years. (see slide 5)

Sales and Earnings trends for CVS have been trending upward, but not in a parallel fashion, especially in years when acquisitions have been made and share dilution has occurred as a result. (see slide 6) If you choose to make the Sales and EPS growth rates the same, EPS would rise 8.6% a year. EPS was reported as $2.19 at Q3 08, and would rise to $3.31 in 5 years.

Looking at the preferred procedure for CVS shows some differences between computer generated data and that provided by VL. Pre Tax Margin (PTM) has improved quite a bit in recent quarters. The 5 year average PTM from SA is 5.1%; last year the rate was 5.8% and last quarter the rate was 6.5%. In the most recent 10Q report, management stated that 6.5% is near their long term goal for PTM. From VL, the future PTM is 7.8%.

VL also has the number of shares outstanding less than what is generated by SA. Management has stated that no new share buy back programs are scheduled, due to the recent purchase of Longs Drug stores. Future Tax Rate for CVS is 39.5% from VL and 40% from Management.

My SSG using the Preferred Procedure predicts earnings growth of  8.5% with high estimated EPS of $3.29. (see slide 7) However, if you feel that CVS will be able to widen margins to 6.5% as management has stated is their desire, EPS growth rate will be 10.2% and high estimated EPS will be $3.55.  This compares to Estimated High EPS from VL of $3.90 or growth of 13.7% annually. (see slide 8) The Estimated High EPS derived from the preferred procedure with VL data (sales growth of 9%, PTM of 7.8%, # of shares=1325 and tax rate of 39.5%) is $4.67, or annual growth of 16.4%. (see slide 9)

The Annual Rates box on the left side of the VL report shows EPS growth of 16%. Analyst Consensus Estimates range from 14% to 16% EPS growth.

The front page of TSSW for CVS shows future EPS growth based on past reliable growth to be 12%, with future EPS of $3.38. However, if we start with earnings from the most recent Qtr. and plot 5 years from that point, growth remains 12% but the Estimated High EPS is $3.86. Growth from the business model shows the same rate of 12%. (see slide 10)

EPS GROWTH CHOICES

* $3.25 is the Estimated High EPS 4 years into the future for WAG; $3.90 is 4.25 years into the future for CVS.

For my SSGs on these companies I have used conservative numbers. (see slide 11 and 12) Base on the front page of the studies, it appears that CVS has better growth potential, especially considering the expansion of margins for the Co. My future EPS estimate may be too low based on future margins for the Co. As we go through the rest of the SSG, I will see if one offers better value at the current prices.