Walgreens Stock Down 50% But Revenues Are Up 17%?

by Trefis Team
Walgreens Boots Alliance
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The stock price of Walgreens Boots Alliance (NYSE: WBA) has seen a decline of roughly 50% since the end of 2016. But, what went wrong given that Walgreens’ revenue grew 17% from 2016 to 2019? Well, there is a good reason – its P/E multiple has contracted 60% over the same period, as investors revised their expectations of future earnings growth from Walgreens. This can partly be attributed to the company’s UK business facing stiff competition from online retailers, which has resulted in the shutdown of several stores. Furthermore, the company’s margins, which are already thin for this business, have also contracted 5%. Our dashboard, ‘Why Walgreens’ Stock Price Has Declined 50% Since Early 2017 Despite Revenues Growing 17%?‘ has the underlying numbers. Much of the fall in WBA stock was seen this year, as the company’s UK business continued to remain an overhang, and despite sales growth in the U.S., Walgreens posted a 46% decline in Non-GAAP earnings per share in Q3. The company also recorded a $2 billion impairment charge for its UK business during the quarter.

What Brought About A Change In Earnings And Multiple?

The contraction in Walgreens’ net margins (non-GAAP) from 4.3% to 4.0% was brought about by higher cost of sales, which as a percentage of revenue, grew from 75% to 78% between 2016 and 2019. Though the margin contracted slightly, a revenue growth of 17% from $117 billion to $137 billion, helped Walgreens post a 30% growth in its non-GAAP earnings from $4.59 to $5.99 per share. The earnings growth was also bolstered by over $15 billion the company spent on share repurchases over the same period.

However, the bigger change in stock price came from a 60% contraction in the company’s P/E multiple, which decreased from 16.4x in early 2017 to over 6.6x currently. This can be attributed to investors revising their expectation for future earnings growth from Walgreens downward. Walgreens is seeing stiff competition for its UK business, and it has closed over 40 stores over the recent years. Given the impact of Covid-19, the UK business is expected to continue to weigh on the company’s overall performance in the near term. That said, the selling in Walgreens stock appears to be overdone. The company is working toward cost management and aims to reduce the costs by $2 billion annually by 2022, which will translate into margin expansion. Given that the stock is trading at a very low valuation, it may interest investors who are willing to be patient. In fact, even if we were to look at a forward earnings multiple, WBA stock now trades at 8.4x expected 2020 earnings, and 7.4x 2021 earnings, which compares with P/E multiples of 15x in 2016, and 12x as recent as 2019.

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