Here’s Why Walgreens Stock May Underperform In The Near Term

by Trefis Team
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Walgreens Boots Alliance
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[Updated: 5/27/2021] WBA Stock Decline

The stock price of Walgreens Boots Alliance (NASDAQ:WBA) has seen a 5% drop over the last five trading days, and we believe that the stock will underperform the broader markets in the near term. Much of the recent decline came on May 26, after reports of Amazon (NASDAQ:AMZN) eyeing brick and mortar pharmacy stores. Retail pharmacies such as CVS and Walgreens have already seen an impact on their stock after Amazon launched Amazon Pharmacy last year on its online store. For Amazon, it may make sense to add a pharmacy counter at its existing 500 Whole Food stores. However, going by the recent report, the company is looking into options of either going with standalone pharmacy stores or adding pharmacy to the existing Whole Food stores.

Walgreens’ peer – CVS Health – has been working on enhancing its offerings at its stores with more health care services, and it is also more diversified with the Aetna acquisition. Even Walgreens has been working to open around 500 community clinics over the coming years. This will likely help the company’s revenue growth in the long run. That said, the impact will be more profound on Walgreens, which has already been struggling with its international business, primarily due to online discounted pharmacies impacting its sales, and if Amazon’s entry into brick and mortar pharmacy stores is confirmed, it will adversely impact the  Walgreens stock price.

According to the Trefis Machine Learning Engine, which identifies trends in a company’s stock price using historical stock data, returns for WBA stock average around 1% in the next one-month (twenty-one trading days) period after experiencing a 5% fall in a week (five trading days), lower than the 3.1% expected return for the S&P500 over the next month (twenty-one trading days). 

But how would these numbers change if you are interested in holding WBA stock for a shorter or a longer time period? You can test the answer and many other combinations on the Trefis Machine Learning Engine to test Walgreens Boots Alliance stock chances of a rise after a fall. You can test the chance of recovery over different time intervals of a quarter, month, or even just one day!

Some Fun Scenarios, FAQs & Making Sense of Walgreens Stock Movements:

Question 1: Is the average return for Walgreens Boots Alliance stock higher after a drop?

Answer: Consider two situations,

Case 1: Walgreens Boots Alliance stock drops by -5% or more in a week

Case 2: Walgreens Boots Alliance stock rises by 5% or more in a week

Is the average return for Walgreens Boots Alliance stock higher over the subsequent month after Case 1 or Case 2?

WBA stock fares better after Case 1, with an average return of 1.5% over the next month (21 trading days) under Case 1 (where the stock has just suffered a 5% loss over the previous week), versus, an average return of 0% (no change in stock price) for Case 2.

In comparison, the S&P 500 has an average return of 3.1% over the next 21 trading days under Case 1, and an average return of just 0.5% for Case 2 as detailed in our dashboard that details the average return for the S&P 500 after a fall or rise.

Try the Trefis machine learning engine above to see for yourself how Walgreens Boots Alliance stock is likely to behave after any specific gain or loss over a period.

Question 2: Does patience pay?

Answer: If you buy and hold Walgreens Boots Alliance stock, the expectation is over time the near term fluctuations will cancel out, and the long-term positive trend will favor you – at least if the company is otherwise strong.

Overall, according to data and Trefis machine learning engine’s calculations, patience absolutely pays for most stocks!

For WBA stock, the returns over the next N days after a -5% change over the last 5 trading days is detailed in the table below, along with the returns for the S&P500:

You can try the engine to see what this table looks like for Walgreens Boots Alliance after a larger loss over the last week, month, or quarter.

Question 3: What about the average return after a rise if you wait for a while?

Answer: The average return after a rise is understandably lower than after a fall as detailed in the previous question. Interestingly, though, if a stock has gained over the last few days, you would do better to avoid short-term bets for most stocks.

It’s pretty powerful to test the trend for yourself for Walgreens Boots Alliance stock by changing the inputs in the charts above.

[Updated: 4/22/2021] Walgreens Update

Last month we discussed why Walgreens Boots Alliance (NASDAQ:WBA) stock looked undervalued at $47, given the Covid-19 testing and vaccination at the Walgreens stores. This is expected to boost its top-line growth in the near term. Earlier this week, the company announced that it has entered into an agreement with Abbott (NYSE:ABT) to make available the BinaxNOW rapid antigen self test for Covid-19 at its stores. The test is priced at $23.99 and can be purchased without a prescription. While there is a rise in vaccinations in the U.S., with 40% of the population receiving at least one dose of a vaccine, the demand for testing is expected to remain high in the near term, boding well for Walgreens’ business.

While the WBA stock, along with its rival CVS, has been weighed down over the recent past due to Amazon’s entry into online pharmacy, Walgreens has been focused on improving its retail store experience to stay relevant. The company is making full service in-store doctors available at many of its stores, making the stores themselves neighborhood health centers. This will likely be beneficial for the company in the long run.

In the near term, Walgreens will benefit from its cost management program, under which it has closed several of its outlets for better store optimization both in the U.S. and U.K., and improved its IT capabilities aimed to expand its margins. This clubbed with Covid-19 testing and vaccination programs will likely result in a strong earnings growth for Walgreens in 2021 and 2022. We continue to believe that WBA stock is attractive even at the current levels of $54, which is still below the pre-pandemic levels of $60 seen in January 2020, and 26% below the levels of $73 seen toward the end of 2017. Our dashboard on WBA Stock Decline Since 2017 analyzes the factors that led to this drop.

[Updated: 3/5/2021] WBA Stock Undervalued At $47

The stock price of Walgreens Boots Alliance (NASDAQ:WBA) looks attractive at current levels of $47, as it is up a mere 7% from the levels it was on March 23, 2020, when broader markets made a bottom due to the spread of Covid-19. This marks a significant underperformance compared to the S&P which has moved 70% since its March 2020 lows, with the resumption of economic activities as lockdowns are gradually lifted and vaccination programs have been initiated in multiple countries. This underperformance can partly be attributed to investor concerns over Amazon’s entry into online pharmacy, that is likely to result in market share loss for pharmacies, such as Walgreens and CVS Health. WBA stock is also down 31% from levels of around $69 seen toward the end of 2018.

Some of the 31% decline of the last 2 years or so is justified, given the company’s lackluster fundamentals. Walgreens’ total revenue grew 6% to $139.5 billion in fiscal 2020 (fiscal ends in August), as compared to $131.5 billion in 2018. However, the company saw a decline in its net margins from 4.6% in 2018 to 3.0% in 2020, resulting in a 30% decline in net income from $6.0 billion in 2018 to $4.4 billion in 2020, on a non-GAAP basis. The company saw an 11% decline in total shares outstanding due to share buybacks, and on a per share basis, adjusted earnings declined 21% to $4.74 in 2020, as compared to $6.02 in 2018. Given the lackluster performance over the recent years, WBA’s P/E multiple also contracted, but it will likely see a rebound from the current levels. Our dashboard, ‘What Factors Drove -30% Change In Walgreens Stock between 2018 and now?‘, has the underlying numbers.

Walgreen’s P/E multiple contracted from 14x in 2017 to 8x in 2020 based on trailing non-GAAP EPS. While the company’s P/E is at 10x now, it can see an expansion in the near term, led by steady earnings growth. We discuss more in the section below.

So what’s the likely trigger and timing for upside?

Though Walgreens managed to grow its revenue in fiscal 2020, its business was also impacted during the pandemic. The global spread of coronavirus has meant more people staying at home, implying lower footfall at its stores. On the other hand, Walgreens along with other pharmacies, has seen a sharp increase in home delivery orders, though that business is subject to added shipping costs, implying lower margins. The company’s UK business, which has been struggling to compete with online retailers that offered discounts, continued to be a drag on the company’s overall performance. Looking at the company’s Q1 fiscal 2021 results, its total revenue grew 6% to $36.3 billion, while its adjusted EPS was down 11% to $1.22, partly due to the increased costs during the pandemic impacting its overall margins.

Now, the company has benefited from Covid-19 testing, with roughly 3 million tests administered thus far, and now with the vaccination drive, Walgreens will likely see steady revenue growth in the near term. While WBA stock has been weighed down by Amazon’s entry into pharmacy, its impact is yet to be seen. For now, the company doesn’t expect much disruption, given only 10% of the U.S. prescriptions filled go through the mail-order. Lastly, the company’s decision to close many of its stores, under its store optimization program, especially in the UK, means that the margins will likely improve going forward. Keeping these factors in mind, we believe the company will likely see steady earnings growth over the coming years.

Walgreens will likely see an increase in footfall at its stores going forward, as the Covid-19 crisis winds down. That said, any further recovery in the economy and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Looking at valuation, at the current price of $47, Walgreens is trading at under 10x its estimated adjusted EPS of around $4.85 in fiscal 2021, compared to levels of over 14x seen in 2017, and 11x seen in 2018, implying there is more room for growth for WBA stock.

While WBA stock may see higher levels, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for UnitedHealth vs Ingevity.

See all Trefis Price Estimates and Download Trefis Data here

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