Will Walgreens Stock See Higher Levels?

Despite a 10% fall year-to-date, at the current price of around $48 per share, we believe Walgreens stock (NASDAQ: WBA) has only a limited upside. WBA stock fell from about $54 in early January to $48 now. The -10% move for WBA so far this year compares with -11% returns for the broader S&P500 index. Looking at the longer term, WBA stock is down 30% from levels seen in late 2018. This marks a significant underperformance compared to its peers and the broader markets, with CVS Health stock rising 65% and the S&P 500 index rising 70% over the same period. Our dashboard – Why Walgreens (WBA) Stock Moved – provides more details on the factors behind this move over the last three years.

Now, much of this decline over the last three years was driven by the company’s P/S ratio, which plummeted from 0.6x in 2018 to 0.3x currently. Walgreens’ revenue increased 37% to $135 billion over the last twelve months, compared to $98 billion in 2018. The pandemic resulted in higher revenues in 2020 and 2021, driven by increased demand for Covid-19 testing and vaccine administration. The company has also benefited from its international pharmaceuticals business and expansion of its online healthcare platform (Find Care). The total shares outstanding declined to 867 million currently, compared to 992 million in 2018. This meant that revenue per share rose 57% to $155.71 in the last twelve months, vs. $99.15 in 2018.

Given the high vaccination rate (with at least one dose) of 77% in the U.S., the revenue contribution from vaccine administration is expected to decline over the coming quarters. That said, with economic growth picking up pace, Walgreens’ other businesses, including retail and pharmacy, are expected to see robust growth going forward. With restructuring initiatives, such as the sale of its Alliance Healthcare business and setting up a joint-venture in Germany for the pharmaceuticals wholesale business, the company can look forward to steady earnings growth going forward.

Now, WBA stock price was weighed down due to multiple factors, including the tepid performance of its Boots stores in the U.K., due to stiff competition from online retailers. The company received a takeover bid for its Boots stores in the U.K. earlier this year. Walgreens may consider either selling or a spin-off of its Boots stores. Also, Amazon has entered the online pharmacy business, casting shadows over the revenue growth trends for retailers, including Walgreens.

We estimate Walgreens valuation to be $53 per share, which is only 11% above its current market price of $48. This represents a forward P/EBITDA of 8x based on Walgreen’s EBITDA.

While we believe that there is a little room for growth in WBA stock going forward, there are near-term headwinds. Given the geopolitical tensions between Russia and Ukraine, it is likely that the broader markets may remain volatile in the near term, impacting WBA stock as well.