Down 36% YTD Walgreens Stock Looks Attractive At Current Levels

by Trefis Team
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Trefis
WBA
Walgreens Boots Alliance
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We believe that Walgreens Boots Alliance stock (NASDAQ: WBA) may be a good buying opportunity at the present time. WBA stock trades near $38 currently and it is, in fact, down 36% so far this year (from $59 at the beginning of 2020). It traded at $44 in late March 2020 – when the markets made a bottom – and is currently 13% below that level as well. This marks a significant underperformance compared to the broader markets, with the S&P 500 rallying 60% since its March lows, and the index is now up 9% thus far in 2020. This underperformance can partly be attributed to news of Amazon’s entry as an online pharmacy. Walgreens has already been struggling with its UK business due to stiff competition from online retailers. That said, the company’s management has stated that Amazon’s entry should not be worrying given that mail-only service currently accounts for only 10% of prescriptions filled in the U.S., and usually people remain loyal to physical drugstores. We believe that the stock is oversold now and it will likely see an upside from the current levels. Our conclusion is based on our comparative analysis of Walgreens Boots Alliance stock performance during the current financial crisis with that during the 2008 recession in our interactive dashboard.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 60% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how WBA stock and the broader market fared during the 2007-08 crisis

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

WBA and S&P 500 Performance Over 2007-08 Financial Crisis

WBA stock declined from levels of about $40 in September 2007 (pre-crisis peak) to levels of $24 in March 2009 (as the markets bottomed out), implying WBA stock lost 41%. It recovered post the 2008 crisis, rallying a strong 54% to levels of $37 by January 2010. In comparison, the S&P 500 Index saw a decline of 51% from its peak in September 2007 to its bottom in March 2009, followed by a sharp recovery of 48% by January 2010.

Walgreens Company Fundamentals Over Recent Years Have Been Good

Walgreens has been able to consistently grow its revenues from $103 billion in 2015 to $139 billion in 2020 (Walgreens’ fiscal ends in August), primarily led by growth in its U.S. retail business, which more than offset the decline in the company’s international stores sales. However, Walgreens Net Margins have declined from 3.9% to 3.0% over the same period. This has impacted the EPS, which grew just 22% to $4.74 (vs $3.88 in 2015) compared to a 35% growth seen in revenues. More recently, the company’s Q4 revenues saw a 2.3% y-o-y growth led by growth in prescriptions filed. The company reported earnings of $1.02 on a per share and adjusted basis, a decline of 28% compared to $1.43 in the prior year quarter. The earnings decline can be attributed to continued pressure on its margins from international business, as well as the adverse impact of Covid-19.

Does Walgreens Company Have Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Walgreens total debt decreased from $19 billion in 2016 to under $16 billion at the end of fiscal 2020, while its total cash came down from $10 billion to $0.5 billion over the same period. Walgreens generated cash from operation of $5.5 billion in fiscal 2020. The company has enough liquidity cushion to weather the current crisis.

Conclusion

Phases of Covid-19 Crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-October 2020: After poor Q2 results, Q3 expectations were lukewarm, but continued improvement in demand, and progress with vaccine development buoyed market sentiment

As the global economy opens up and lockdowns are lifted in phases, consumer demand is expected to pick up. This could be reflected in the form of a pick-up in revenue toward the end of 2020, followed by revenue growth in 2021, boding well for the stock in the near term.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

 

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