Is Walgreens Stock A Better Pick Over This Giant Retailer?

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Walgreens Boots Alliance

We believe Walgreens stock  (NASDAQ: WBA) is currently a better pick than Walmart stock (NYSE: WMT), given its better prospects. Although Walgreens is trading at a comparatively lower valuation of 0.3x, trailing revenues than 0.7x for Walmart, this gap in the valuation is justified given the latter’s superior revenue growth, profitability, and lower financial risk, as discussed below.

If we look at stock returns, Walmart, with a 6% rise this year, has fared better than Walgreens, down 21%, and the broader S&P 500 index, down 17%. There is more to the comparison, and in the sections below, we discuss why we believe WBA stock will offer better returns than WMT stock in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Walgreens vs. WalmartWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Walmart’s Revenue Growth Is Better

  • Walmart’s revenue growth of 3.8% over the last twelve months is better than -2.6% for Walgreens.
  • Even if we look at a longer time frame, Walmart fares better, with its sales rising at an average annual rate of 3.7% to $573 billion in fiscal 2022 (fiscal ends in January), compared to $514 billion in fiscal 2019, while Walgreens’ sales rose at an average growth rate of 26.6% to $109 billion in fiscal 2022 (fiscal ends in August), compared to $104 billion in fiscal 2019.
  • Walgreens’ revenue growth over the recent years was driven by increased demand for Covid-19 testing and vaccine administration. Now with the worst of the pandemic likely behind us, the company is seeing a lower contribution from the Covid-19 testing and vaccine administration. However, it also means a rise in footfall at its stores and continued expansion of its online healthcare platform (Find Care).
  • Walmart’s revenue growth over the recent past is driven by increased consumer spending on groceries and other necessities. Walmart’s wide offering and focus on cost-conscious shopping will likely bolster its sales in a high inflationary environment. However, the company is struggling with excess inventory, rising costs, and supply chain issues this year.
  • Our Walgreens Revenue Comparison and Walmart Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, Walmart’s revenue growth over the next three years is expected to be marginally better than Walgreens’. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 1.6% for Walgreens, compared to a 1.9% CAGR for Walmart, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
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2. Walmart Is More Profitable, And Comes With Lower Risk

  • Walmart’s operating margin of 3.4% over the last twelve-month period is better than 2.0% for Walgreens.
  • This compares with 2.6% and 5.8% figures in 2019, before the pandemic, respectively, implying Walgreens enjoyed better margins before the pandemic.
  • Walmart is trying to reduce its excess inventory by marking it down, and this has hurt its profit margins in the recent past.
  • Walgreens’ free cash flow margin of 3.6% aligns with Walmart’s.
  • Our Walgreens Operating Income Comparison and Walmart Operating Income Comparison dashboards have more details.
  • Looking at financial risk, Walmart is better placed among the two. Its debt as a percentage of equity of 10.9% is much lower than 32.9% for Walgreens, while its 5.6% cash as a percentage of assets is higher than the 2.7% for the latter, implying that Walmart has a better debt position and more cash cushion.

3. The Net of It All

  • We see that Walmart has demonstrated better revenue growth, is more profitable and comes with lower financial risk, given its better debt position and higher cash cushion. On the other hand, Walgreens is trading at a comparatively lower valuation.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Walgreens is currently the better choice.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 18% for Walgreens over this period and a -3% expected return for Walmart stock, implying that investors will likely be better off buying WBA over WMT, based on Trefis Machine Learning analysis – Walgreens vs. Walmart – which also provides more details on how we arrive at these numbers.

While WBA may outperform WMT, it is helpful to see how Walgreens’ Peers fares on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities, which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Target vs. Amerco.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Nov 2022
MTD [1]
YTD [1]
Total [2]
WBA Return 13% -21% -50%
WMT Return 7% 6% 121%
S&P 500 Return 2% -17% 77%
Trefis Multi-Strategy Portfolio 2% -20% 215%

[1] Month-to-date and year-to-date as of 11/29/2022
[2] Cumulative total returns since the end of 2016

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