Walgreens: Are there good times ahead?

 Overview:

It has been 7 years since the very hyped merger between Walgreens (the 2nd largest pharmacy chain in the US) and Boots Alliance (Swiss pharmacy giant). During this period, the company’s stock price has had a rough ride. After surging close to the three-figure mark ($96 in mid-2015), the stock prices suffered a gradual fall over the next 5 years, highlighted especially by the horrific performance during the pandemic-plagued 2020. This year has, however, brought new hope for the company. Should you hop on board this revival or wait for the prices to dip still further? Read on to find out:

Declaring this stock’s performance in 2020 as ‘underwhelming’ would be an understatement! The price fell a third within 12 months, making it the second-worst performer in the Dow Jones Industrial Average! The prices recovered much of the fall in 2021 (it was the third-best DJIA performer in the first half of this year), though it went into a downward spiral last week. However, we feel that the long-term future of the stock is quite attractive. Let’s discuss the reasons for the same:

• The last year was a nightmare for Walgreens Boots Alliance from both operational and financial perspectives. However, 2021 has been much kinder, and the Q3 results announced last week testify the same beyond doubt. Not only did the revenue improve by 12% (partly due to its COVID Vaccination revenues), but it also managed to substantially reduce their operating expenses, eating away the profits, thereby overturning the $1.8 billion operating loss last year into over $1 billion in profits.
• The company’s foray into the digitization of services through its internal healthcare startup (announced in January 2021) is expected to give it a strategic edge in the foreseeable future.
• The company is expected to continue with a dividend yield of 3.5-4% (an attractive figure for those of you who favor periodic cash returns.)
• The PEG Ratio (Price-Earnings/Growth Ratio) of the company (using growth expectations for the next 5 years) is pegged at 2, significantly below its direct competitors CVS (2.68) or Rite Aid (5.56). PEG ratio is an improvement upon the classic P/E ratio and considers growth expectations to trace how rationally is the stock valued. Stocks with lower PEG are more attractively valued.

In other words, WBA is one of the most undervalued stocks in its segment!

The price fall of the last week is, in our opinion, more sentimental than logical. The investors were bearish about the stock thanks to the vaccination revenue boost being temporary. While we understand this, let's not forget that the continued prevalence of lockdowns in the EU, annual booster shots, as well as a weak flu season (thanks to the COVID-19 norms) are temporary too. In other words, the projected decrease in temporary vaccine revenue will be easily offset by the projected increase in revenues once the world returns to normalcy.

Additionally WBA has been working on increasing the focus on its core business – retail pharmacy. It had already announced the completion of a JV with McKesson Corp in November last year, to make the wholesale business in Germany more efficient. In January this year, they also announced the sale of the drug wholesale arm of its operations to AmerisourceBergen for $6.5 billion. The improved efficiency in its core line of business will ultimately translate to better profit margins, and ultimately, better stock valuations.

Conclusion:

The business of the company, like any other retail chain, was hit hard by the pandemic. With brighter days in sight now, we expect the stock to at least reclaim its pre-2020 value. What excites us the most, however, is the future success of the company. With the more burdensome wholesale segment off the head, it can truly focus on its core business, which will be further supported by the much anticipated digital transformation the company is going through!

We, therefore, consider this stock to be a strong overweight! Especially if you are looking at diversifying your portfolio by adding healthcare sector stocks, and are ready to hold them for some time.

Price Target: $58 (21% upside)

Current Price: $48

Rating: Overweight

Target Date: 10 Months

Ticker: WBA