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Walgreens: A 4.4% Yielding Blue Chip Left Behind In The Rubble

Jun. 14, 2020 5:24 PM ETWalgreens Boots Alliance, Inc. (WBA)57 Comments


  • The market rally has left Walgreens behind in deep-value territory.
  • Walgreens continues to see growing demand as evidenced by its growing sales.
  • Margin pressures will eventually stabilize, and the company will benefit from the long-term growth trend in healthcare spend.
  • Walgreens is transforming itself into a localized community healthcare provider of goods and services, which will benefit the company long-term.

With the market having mostly recovered from the pandemic-induced drops in March and April, it would seem that everything is back to normal. However, there are still widely dislocated sectors with the most obvious ones being the hospitality, airline, and banking industries.

While those industries are understandably challenged in the near to medium term, amidst the rubble are some stocks that have been unfairly lumped into the underperformance category, and Walgreens (NASDAQ:WBA) is one of them. I believe the stock is set for market-beating returns at the current overly pessimistic valuation today due to its transformational efforts and macro-health trends.

(Source: Drug Store News)

Shares Have Vastly Underperformed

Walgreens has vastly underperformed against the S&P 500 over the last six months. As seen below, the market recovery that began in April has left Walgreens shares in the dust, with shares underperforming by a wide 25%. Not only that, but it has also underperformed its peer CVS Health (CVS) by 16%.

(Source: Yahoo Finance)

While it may seem based on the chart above that all is doom and gloom for Walgreens, I believe that is simply not the case, as the company has a number of things going for it.

Over-Pessimism Is Not Justified

Walgreens actually grew its revenues at 4.1% on a constant-currency basis, suggesting that demand for its stores and services is not waning.

(Source: Company Presentation)

What's likely drawing the ire of the market is the 12% decline in operating income that it experienced. While management noted that it was partly due to the trend of lower pharmacy gross margins, it was also attributed to one-time impacts that are not expected to be repeated.

(Source: Company Presentation)

Looking past fiscal 2020 and into the future, I expect the company's Transformational Cost Management Program to start bearing fruit, as management has

This article was written by

Gen Alpha profile picture

I'm a U.S. based financial writer with an MBA in Finance. I have over 15 years of investment experience, and generally focus on stocks that are more defensive in nature, with a medium to long-term horizon. My goal is to share useful and insightful knowledge and analysis with readers.  Contributing author for Hoya Capital Income Builder. 

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in WBA over the next 72 hours. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (57)

Good article. Another positive about Walgreens is that it owns a 27% stake in AmerisourceBergen Corp. ABC has been making new highs lately and has a market cap of $20.78 billion. So if you buy Walgreens you get a twofer in the bargain. ABC closed this afternoon at $102.15 a share. It started the year at $85.00 so it is giving Walgreens a nice boost.
For starters they would be well advised to change their name.
you really want to invest in these type of companies with Biden looming as a possible president,don't think for one second that once he's president he's not he's going to change his mind saying he wants a universal healthcare I will almost guarantee it, I'm starting to pull out of all my healthcare stocks now I'll leave a little bit with biotech until there's a cure but buyer beware you've been forewarned
Dividend Ambassador profile picture
@gymhog why would universal healthcare necessarily be bad for WBA???
cuz everytime they talk about universal health healthcare of the individual health companies drop like a rocket. hey I could be wrong I'm not an analyst and I'm not a professional broker. it just seems like every time they talk about universal health Care any stock having to do with healthcare drops, in the short-term I'll play biotech instead for the next couple months
@gymhog In the UK we have universal healthcare and Boots is doing just fine! If their numbers have gone down a bit that's because of people buying less cosmetics from them but the pharmacies are fine.
team Gabe profile picture
great article
I just placed an order to sell Jan 42.5/40 put spreads. I'm looking to take $140 credit per spread.
That's a pretty good price. Slightly in the money at the time?
team Gabe profile picture
just sold at 125, still a pretty nice premium
ijeff profile picture
Conventional wisdom seems to be CVS has outmaneuvered Walgreens. I think its way too soon to write WBA off. There is a lot of pessimism built into WBA and a feeling that they are broken and can't be fixed. Time will tell and its way too soon to crown a winner and loser.
CVS is about 1/3 off its highs of a couple of years ago. WBA is about 50% off of its highs. RAD would be a penny stock if not for their 20:1 reverse split.

I think "conventional wisdom" is that the whole segment stinks, largely because AMZN deciding to go all-in with PillPack would send them all reeling. I think it is easier said than done for AMZN -- Rx drugs come with all sorts of problems -- but it is correct that they "loom".

I think WBA is the best "value" among them just based on cash flow and balance sheet strength v market cap.
Gen Alpha profile picture
@SayItWithLyrics industry consolidation has been happening even before Amazon came onto the scene, with independent pharmacies falling to the likes of CVS and Walgreens. Rite Aid was the latest as it was the weakest of the three. Amazon is the newest threat, and Walgreens is adapting.
Dividend Ambassador profile picture
@ijeff @SayItWithLyrics @Gen Alpha Guys, I think CVS has a very rational strategy for transforming its bricks and mortar from retail household goods and prescriptions to retail primary care. But, I don’t see any reason why WBA cannot copy CVS. They are already doing this. WBA should be okay.
Good article and hope based on data you present Walgreen recovers. After it acquired Booths in u.k. and comp. from amazon it went down and down and never recovered.- Max
Gen Alpha profile picture
@mxversi thanks, glad you liked it.
Long WBA for a while now. One of my investments I don't really worry about although I am down somewhere in the fifteen percent range. Counting dividends and options money something less. I wound up selling ABBV recently for a solid gain and have some regrets I didn't set my price higher but I bet I can buy it back for less than I sold it in time. CAH, CVS, I am already trying to buy back for less than I sold them. All were out of favor not long ago and in these times they pretty much lead the market.
Peter Jaworowski profile picture
Thanks for the nice article. I think your article partially nails why Walgreens is so cheap...

They are trying a variety of partnerships, services, etc in their stores, but many of these are still in trial phases with no clear message about a nationwide rollout, if there will even be one.

I think the market wants to see where the growth will come from beyond the expected increase in pharmacy claims. Personally I think an expanded partnership with Kroger could help, where Walgreens would actually sell Kroger branded food items, and maybe Walgreens can run Kroger's pharmacies??? Just a thought.

I see Walgreens is getting more aggressive in promoting their app, they have a new partnership with Postmates, the idea where people can buy things and pick them up in the drive thru is a good one, those should all help. Walgreens has been promoting their online shopping more, but I don't know how well this will work on merchandise, since Walgreens isn't a low cost option, so why would someone buy from here rather than Walmart or Amazon?

The stock is definitely cheap at these levels though and has the potential to appreciate as a clear vision and strategy for growth is communicated.
Gen Alpha profile picture
@Peter Jaworowski thanks. They have a strategic partnership with Microsoft to expand their digital footprint, which we should be seeing more of in time.
Nice article on a solid company, we use Walgreens and have had very good service from the folks. Seem to be very busy when we need to go there and the stores do carry a variety of items. Added some ABBV today but Walgreens on the watch list.
Gen Alpha profile picture
@woodland thanks, all the best.
If WBA wasn't controlled by Pessina, it would be the perfect Berkshire / Buffett buy right now. But I don't think Pessina wants to give it up.
Gen Alpha profile picture
@SayItWithLyrics well, Pessina did enter into talks about a private equity buyout earlier this year, although that appears shelved for now.
@Gen Alpha

He was trying to do a privatization buyout with him still having controlling interest and the PE house funding the deal (I think it was with KKR). Surprised it didn't go anywhere, but these things sometimes simmer just below the surface and then suddenly re-appear in public...

I think if he put the company on the auction block, they could generate a bidding war. But that would mean him giving up control and likely the CEO spot, and I don't think he wants to do that.
Gen Alpha profile picture
@SayItWithLyrics thanks for the added insight.
Dividend aristocrat WBA, is very undervalued at this time.
BM Cashflow Detective profile picture
WBA still has still tremendous competitive advantages. Because of their size, they have enormous economies of scale. Acquisitions and mergers have also resulted in significant cost synergies. The location of the shops is generally still advantageous, as they can be reached within a few minutes. In addition, increasing and aging population groups will continue to increase the demand side due to the demographic factor. The number of retail prescriptions increased by 14% between 2016 and 2019 and it is likely that pharmacy revenues will also increase by 14% in the next 3 years. Pharmaceutical wholesale will also continue to grow in the next few years. The Pharmacies have consolidated in recent years and have become significantly more competitive. Efficiency has increased and costs have decreased. Smaller retailers cannot compete with it. That is just a few positive arguments. It is normal for most market participants to only see the bad news due to the grueling drop in stock prices. But most of it should be priced in by now. Doubt and uncertainty are currently the biggest allies for investors on the buyer side. The upside potential is getting bigger. The market gives interested investors the time to enter continuously and at affordable prices over longer periods. In my view, this is a gift for the patient investor. Additionally rewarded with a high dividend as a holding bonus. Basically, you can only be successful as an investor if you invest differently and countercyclically than the others. WBA is the right asset for this type of strategy.
If I trusted my lying eyes, I should be surprised how WBA still stays open. In SoCal, their locations are usually crummy ghost towns. Our CVS stores are maybe just a little bit better. Still, even CVS is so desperate that for the past couple of years they have been giving people free $5 each month so that they would come and buy something. I am still filling my prescriptions at my local CVS mainly b/c I think some the girls are cute; but still I do not have a strong attachment to their pharmacy and I think the future is probably something like PillPack.

Oh, and then there is RiteAid. You can shoot a post-apocalypse zombie movie there, the decor is very appropriate.
Gen Alpha profile picture
@A Serious Man thanks for your perspectives. Walgreens is still seeing increased demand for its stores based on increasing revenue numbers. As with any company, I wouldn't be surprised to see it close under-performing ones and open in higher demand locations.
Sure, thanks for the article. I understand that WBA appears to be cheap and reliable, but I have a problem reconciling the numbers with what I am seeing in their stores. Maybe this is just my corner of SoCal)
smurf profile picture
Nice article.

As a pharmacy, I think Walgreens isn better than CVS, which isn't hard to achieve and is damning with faint praise. Some locals here, such as Publix are the best, but they're not nationwide.

As a business, I can't find much wrong. Debt's been coming down, dividends have a raise history and are well covered with both earnings AND free cash flow, Sales and earnings have a decent record.

Good buying opportunity, in my view. Most peg fair value at around $55.
Gen Alpha profile picture
@smurf thanks. Plus management is shareholder friendly with share buybacks.
I own the stock, but view buybacks as the biggest SCAM on WS. Buybacks really only enrich the execs stock options and short term traders.

WBA is on a short leash in my portfolio and the dividend isn't enough to keep me in the stock, if it continues to just wander.
Dividend Ambassador profile picture
The author has nailed it. WBA may be the cheapest blue chip available today.
Gen Alpha profile picture
@killiondt thanks, all the best.
craftbrewinfo profile picture
Or perpetually cheap for a reason ... I chose and invested in CVS because I believe their path, management and structure is far superior to that of WBA
ijeff profile picture
Perhaps the CVS structure will prove to be superior. As far as retail pharmacy quality, CVS can't hold a candle to Walgreens. I am forced to use CVS for prescriptions now, but I still use Walgreens for drug research as CVS never has the information you need. Very frustrating.

WBA has to find a way to maximize their superior retail pharmacy experience, but its going to be difficult if customers such as myself are forced to use CVS for our drug plans. Very smart move by CVS because other than that I never would have switched from Walgreen.
Independant pharmacies destroyed in cities with protests will find hard if not impossible to return adding to the monopoly of awful chains like cvs and walgreens. This will enable them to further cut labor costs in every region. More supply of pharmacists has driven salaries down.
I am 60 year old pharmacist who was replaced by a 34 year old over a year ago. She is working for 20% less and working 20% more ..rinse and repeat x 8000 stores. They cut bonuses too. Walgreens terrible to work for but unfortunately I continued to hold stock. At least i have divi and selling options for income on this unethical dog.
Blue Shield profile picture
"Independent pharmacies destroyed in cities with protests will find hard if not impossible to return " YOU Mean Destroyed by Rioters.
Actually rioter and looters. I watched a clip this morning of dozens of looters working to clean out the rail cars on a train as it was pulling away. Police nowhere of course. Still can’t figure out this obsession of the young to document their criminal activities with phones as they loot. It would appear a great source of information for criminal prosecution.
Yes blue sheild. I did, and should have said rioters, criminals, hodlums.
A chronically undervalued equity at almost any point in recent time, only to be less later on. Peaked exactly 5 years ago. Needs a catalyst, which management has been unable to provide despite much activity of trying.
Clauser1960 profile picture
Wba is seriously undervalued.
Gen Alpha profile picture
Agreed, thanks.
Lallemand profile picture
Thanks for the article. Long WBA, deep value or value trap? Time will tell.
Gen Alpha profile picture
@Lallemand thanks, all the best.
WBA stock price is based on Amazon-fear.

$36B market cap, and they company generated $4.5 to $5B in Free Cash Flow (FFO less capex) each of the last two years, and for the 1st 2 qtrs of fiscal 2020 is tracking to repeat that or possibly improve it. And their debt of $11B is about 1.5x EBITDA and only about 2.5x FCF.

So you are buying this global powerhouse for 7-8x FCF, and with a solid balance sheet? Should be worth at least 12x FCF, maybe more like 15x with interest rates collapsing.

But the markets fear Amazon, and maybe rightfully so.

I'm holding WBA on the expectation that one day a few big Wall St names will figure out the real value here and run it up to $60 or $70 in a week.

There was a good reason Pessina wanted to take it private. At this value, it is a cash flow machine. Whatever happened to his talks with KKR and others?
DonPaul Olshove profile picture
I wonder if WBA's retail store footprint hasn't tossed it in with all the other retail REITs that are being trashed? But then I have to explain CVS running against WBA for the last year or so. A lot I don't understand here.
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