After A 4% Fall Last Year Is Target A Better Pick Over Walgreens Stock?

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Given its better prospects, we believe Target stock (NYSE: TGT) is a better pick than Walgreens stock (NYSE: WBA). Although these companies are from different sectors, we compare them because they have a similar gross profit of around $27 billion, with sales of $139 billion for Walgreens and $109 billion for Target. The decision to invest often comes down to finding the best stocks within the parameters of certain characteristics that suit an investment style. The size of profits can matter, as larger profits can imply greater market power. In the sections below, we discuss why we believe TGT will offer higher returns than WBA in the next three years. In this note, we compare a slew of factors, such as historical revenue growth, returns, and valuation.

Looking at stock returns, WBA stock has suffered a sharp decline of 35% from levels of $40 in early January 2021 to around $25 now, while TGT stock has seen a decline of 20% from levels of $175 to around $140 over the same period. This compares with an increase of about 25% for the S&P 500 over this roughly three-year period.

However, the decrease in WBA and TGT stocks has been far from consistent. Returns for WBA stock were 31% in 2021, -28% in 2022, and -30% in 2023, while TGT stock returns were 31% in 2021, -36% in 2022, and -4% in 2023. In comparison, returns for the S&P 500 were 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that WBA and TGT underperformed the S&P in 2022 and 2023.

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In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector, including WMT, PG, and COST, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could WBA and TGT face a similar situation as they did in 2022 and 2023 and underperform the S&P over the next 12 months – or will they see a recovery? We expect some growth in both stocks in the next three years, but TGT will likely fare better between the two.

1. Target’s Revenue Growth Is Better

  • Target’s 12% average annual growth rate in the last three years is much better than 4.5% for Walgreens.
  • Walgreens benefited from increased COVID-19 vaccine and testing demand in 2021 and 2022.
  • In fiscal 2023, Walgreens sales were bolstered by the acquisitions of VillageMD, Shields, and CareCentrix.
  • Increased prescription volume and drug price inflation also aided the sales growth for Walgreens in recent quarters.
  • Target’s revenues increased from around $78 billion in 2019 to about $94 billion in 2020 due to the impact of COVID-19, as consumers stocked up on essentials which gave Target an edge over other retailers during this period. Moreover, sales rose to $109 billion in 2022 as demand picked up further.
  • However, demand has slowed in recent quarters amid weakening consumer spending.
  • If we look at the last twelve months, Target has seen its sales decline by 1.7%, while Walgreens’ sales grew by 4.8%.
  • Walgreens recently reported its Q1’24 results, with sales rising 10% y-o-y to $36.7 billion, with U.S. Retail Pharmacy revenues rising 6% and International and U.S. Healthcare segments seeing 12% sales growth (pro-forma basis).
  • Our Walgreens Revenue and Target Revenue dashboards provide more insight into the companies’ sales.
  • We expect Walgreens’ revenue to grow at a faster rate than Target over the next three years.

2. Target Is More Profitable

  • Walgreens’ operating margin has declined from 0.8% in 2020 to -5.1% in 2023, while Target’s operating margin fell from 6.0% in 2019 to 3.5% in 2022.
  • Also, looking at the last twelve months period, Target’s operating margin of 4.7% fares better than -5.1% for Walgreens.
  • The decline in operating margin for Walgreens can partly be attributed to a $5.5 billion after-tax charge for opioid-related claims and litigation in fiscal 2023.
  • Looking at financial risk, Walgreens’ 152% debt as a percentage of equity (with total debt of $33 billion and a market capitalization of $22 billion) is much higher than 29% for Target, and its 1% cash as a percentage of assets is lower than 3% for the latter, implying that Target has a better debt position and more cash cushion.

3. The Net of It All

  • We see that Target has demonstrated better revenue growth, is more profitable, and has a better financial position.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Target is the better choice of the two.
  • Even if we compare the current valuation multiples to the historical averages, Target fares better, with its stock currently trading at 0.6x revenues vs. the last five-year average of 0.8x. In contrast, Walgreens’ stock trades at 0.3x revenues aligning with its last five-year average.
  • While Walgreens does have some positives to look forward to, with its recent acquisitions, higher taxes, a weak consumer environment, and lower COVID-19-related sales will likely weigh on its near-term performance. The company expects fiscal 2024 earnings to be between $3.20 and $3.50 compared to $3.98 in fiscal 2023.

While TGT may outperform WBA in the next three years, it is helpful to see how Walgreens’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

 Returns Jan 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 WBA Return -2% -2% -69%
 TGT Return -3% -3% 92%
 S&P 500 Return -1% -1% 112%
 Trefis Reinforced Value Portfolio -4% -4% 583%

[1] Month-to-date and year-to-date as of 1/4/2024
[2] Cumulative total returns since the end of 2016

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