Following its removal from the prestigious Dow Jones Industrial Average (Dow), Walgreens Boots Alliance (NASDAQ:WBA) finds itself amidst a turbulent period. The pharmacy giant has seen a staggering 17.8% decline in its stock value year-to-date, significantly underperforming the broader market.
Initially included in the Dow in 2018 as a replacement for General Electric (NYSE:GE), Walgreens’ six-year tenure in the index has concluded with its recent dividend reduction, marking its departure from yet another exclusive group – the Dividend Aristocrats.
Amidst these challenges, investors are pondering whether Walgreens’ stock is poised for a rebound or if it’s a stock to avoid. Let’s delve into whether WBA presents a potential buying opportunity or if it’s a value trap at its current valuation.
About Walgreens Stock
Established through the merger of UK-based Boots and US-based Walgreens in 2014, Walgreens Boots Alliance (NASDAQ:WBA) operates as one of the largest integrated healthcare, pharmacy, and retail companies globally. With over 12,500 locations spanning the US, Europe, and Latin America, the company offers a wide array of healthcare products and services. Presently, WBA boasts a market capitalization of $18.3 billion.
Factors Driving WBA’s Performance
Bearish Outlook
Earnings Downturn: Walgreens faces a concerning trend of declining earnings, with a stark 43.1% year-over-year drop in earnings per share (EPS) amidst a 10% revenue increase in the latest quarter. Over the past 16 quarters, WBA has witnessed EPS declines in 11 instances, reflecting operational inefficiencies and challenges in cost management.
Debt Burden and Cash Concerns: WBA grapples with substantial debt totaling $9.3 billion, overshadowing its modest cash reserves of $784 million. This debt-cash imbalance poses liquidity risks and jeopardizes the company’s solvency.
Inflationary Pressures: Despite a moderated inflation rate, rising prices continue to impact Walgreens adversely. As consumers seek value amidst inflationary pressures, the pharmacy giant faces challenges maintaining competitive pricing against general merchandise retailers.
Bullish Outlook
Attractive Valuation: Walgreens’ significant stock depreciation positions it attractively in terms of valuation metrics. With a forward adjusted EPS trading at 6.50x, forward sales at 0.13x, and book value at 0.84x, WBA’s current valuation represents a discount compared to both the sector median and its historical averages.
Dividend Yield: Despite a substantial dividend cut, Walgreens still offers an appealing dividend yield of 4.70%, surpassing the sector median. The dividend reduction is anticipated to generate annual savings of approximately $800 million, facilitating investments in growth initiatives and debt reduction.
Strategic Initiatives: Walgreens pursues strategic asset sales to bolster its financial position. Recent actions include the sale of additional shares in Cencora (COR) worth $934 million and plans to divest its specialty pharmacy business, Shields Health Solutions, and potentially its Boots chain of pharmacy stores in the UK.
Wall Street Perspective
Analysts maintain a “Hold” rating on Walgreens stock, with a mean target price of $25.11, suggesting a potential upside of 17.6% from current levels. Among 15 analysts covering the stock, opinions vary, with 2 rating it as “Strong Buy,” 10 as “Hold,” 1 as “Moderate Sell,” and 2 as “Strong Sell.”
Featured Image: Unsplash
Author Faith Yakubu 
