Buying Walgreens Again

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About: Walgreens Boots Alliance, Inc. (WBA)
by: AllStarTrader
Summary

We review the pharma industry briefly.

Thanks to recent weakness in the healthcare space, I was able to start a position in Walgreens again.

Walgreens is performing well and has a large buyback in place to help support the share price.

Source

Walgreens' (WBA) shares have been under pressure in the past few weeks. The shares have sold off over 20% due to various concerns and general market weakness. While a recently reported quarter by competitor (CVS) was weak, it was not entirely in relation to the pharma/retail business Walgreens operates in. The company continues to grow earnings and has a larger buyback and saves dividend in place to serve investors well. Those who are patient have an attractive entry point to purchase shares at this time.

Why Is Walgreens Unique?

Walgreens Boots Alliance is the largest retail pharmacy across the U.S. and Europe. Walgreens Boots Alliance and the companies it has invested in give it a presence in more than 25 countries and employs more than 385,000 people. With over 13,200 stores in 11 countries as well as one of the largest global pharmaceutical wholesale and distribution networks delivering to pharmacies, doctors, health centers, and hospitals in more than 20 countries, it is much more than the corner drug store many believe it to be. This is the only pharmacy and distribution company to not operate almost exclusively in North America.

Amazon Announces Entry To Pharma Market

On June 28, 2018, Amazon (NASDAQ:AMZN) announced it had entered the Pharma market by making a savvy acquisition of PillPack.

Source: Seeking Alpha

This was a smart play for Amazon which had been wanting to enter the pharmacy space. Due to concerns on the licensing process and drug handling, however, it never made the move. With the acquisition of PillPack, it has automatically gained licenses to distribute in all 50 states.

PillPack started in 2013, and as noted above, last year it generated over $100 million in revenue. Not surprisingly, this is small compared to the relatively large $412.6 billion in pharmaceutical sales in 2017. Walgreens came in second behind CVS, with a rather large $64.3 billion in retail pharmacy sales. We will also take a look at the wholesale pharmacy division which is generating significant revenue as well.

Source: Drug Channels

What is becoming of more concern for investors is the initiative launched between Amazon, Berkshire Hathaway (NYSE:BRK.A) (BRK.B), and JPMorgan (JPM). The new startup called Haven will be a non-profit organization designed to reduce overall healthcare costs to consumers. Between lowering prescription costs and insurance costs we could begin to see pressure in the space for even lower margins. The greater concern is seeing now that Amazon has a distribution method for pharmaceuticals, it can easily integrate this company into the startup to provide prescription services at a low cost. This all being part of a larger plan is certainly worrisome. However, the world is not coming to an end and investors should fear not. Walgreens will not see a business that disappears overnight and the cash flow that is coming in for the years to come will continue to offer shareholder value. The startup itself has said it will be starting slow and then expanding. The company will have much to learn and run into many hiccups along the way as most startups do.

Performance

Walgreens continues to perform well. While the company is seeing pressure in its retail and wholesale pharmacy business, I expect these to be temporary. A company of this size cannot see growth forever and will have its quarters in which sales growth is perhaps less present.

The company last reported earnings that were a beat on the bottom line and showed strong revenue growth.

Source: Seeking Alpha

Some highlights are that U.S. retail pharmacy sales rose 2.8%; however, comps showed a 3.2% decline in retail sales. In the international segment, we saw a decline in both pharmacy and retail sales of 3.5% and 2.6%. Certainly not a positive and something investors should watch for going forward. Lastly, wholesale pharmacy sales slipped 0.2% to $5.7B but this was including a negative currency impact of 6.8%.

Taking a look below we can see how the company is performing overall.

Source: Earnings Presentation

As the company continues to integrate its Rite Aid acquisition, it will continue to see improved margin growth. While capital expenditures are expected to rise during the transition, I would expect synergy and profitability to improve as the Walgreens business model is integrated into these locations.

The company continues to see increased market share growth, which is a positive.

Source: Earnings Slides

As the company grows its pharmacy market share it should see a growth in profitability and retail sales as well. The company continues to expect decent earnings growth of 7-12% going forward for 2019.

Source: Earnings Slides

Even on the low side of the growth expectation, the shares appear undervalued. Especially as the company finds way to cut costs and drive further synergies to the already very strong bottom line. Source: Earnings Slides

With all of this expected to boost the company's profitability, investors should take a look at the current valuation.

Valuation

If we look at the valuation from a 5-year perspective we see that shares are trading below average valuations.

Source: Morningstar

The shares trade at the lowest P/S, P/E, forward P/E, P/CF, and PB that we have seen recently. This offers investors an opportunity to acquire shares when below a historical mean. None the less the company is still producing a growing earnings stream so it is not as if the valuation deserves a readjustment lower.

Taking a look at historical yield, we also see the company is well undervalued.

Source: Yield Chart

With a current yield of 2.94%, investors are getting a yield that has happened less than 5% of the time in the trading history of the company in the last 24 years. It should also be noted that the last increase was almost a year ago and we should soon see another.

Source: Seeking Alpha

Not only did the company raise the dividend 10%, marking the 42nd year of dividend raises, it authorized a huge repurchase program.

Source: 10Q

With more than 50 million shares repurchased already, the company is going to be able to reduce the number of shares outstanding by a rather large amount.

Source: 10Q

While the average price paid is higher than the current share price, the company is most likely reducing that cost average at this time. With $6.69 billion left to use, the company can still reduce shares outstanding by more than another 10%.

The company is well-positioned to continue to return cash to shareholders in the future as well.

Source: 10Q

With a well-laddered debt maturity at fixed interest rates, the company is able to use strong cash flows to pay this debt on time and with no issue. It also has the choice to refinance this debt going forward as it appears interest rate hikes are on a pause for now.

Conclusion

Walgreens' shares have fallen in the past few weeks offering investors a chance to once again buy. The company is performing well and has several initiatives under way to help it continue to drive earnings growth higher. The yield is even becoming attractive for dividend-hungry investors. With another likely 8-10% increase coming in the next few months, investors purchasing shares today would have a yield on cost well over 3%. If shares can revert to their mean valuation for the past 5 years, capital appreciation would be well over 10%. In time as the concerns fade and the company continues to prove itself, investors will once again return to the stock driving the share price higher. It is those willing to wait and have the patience to see a plan in place work that will be rewarded. I am happy to have once again entered the stock.

Disclosure: I am/we are long WBA, CVS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.