Walgreens Likely To Post A 25% Drop In Q3 Earnings

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Walgreens (NASDAQ: WBA) is scheduled to report its fiscal Q3 2024 results on Thursday, June 27 (Walgreens’ fiscal ends in August). We expect WBA stock to trade higher post the Q3 announcement, with its revenue and earnings expected to be above the street estimates. The company will likely benefit from its cost reduction actions, but y-o-y earnings are expected to decline by 25%. Not only do we think Walgreens will post an upbeat Q3, its stock remains undervalued at its current levels of around $16. Our interactive dashboard analysis of Walgreens’ Earnings Preview has more details on how the company’s revenues and earnings will likely trend for the quarter.  So, what are some trends likely to drive Walgreens’ results, and how has the company’s stock performed?

Firstly, let us look at Walgreens’ stock performance in recent years. WBA stock has suffered a sharp decline of 60% from levels of $40 in early January 2021 to around $15 now, vs. an increase of about 45% for the S&P 500 over this period. However, the decrease in WBA stock has been far from consistent. Returns for the stock were 31% in 2021, -28% in 2022, and -30% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that WBA 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 face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months — or will it see a recovery? From a valuation perspective, we think WBA stock is undervalued and it will likely see higher levels. In fact, we estimate Walgreens’ valuation to be around $24 per share, nearly 50% above its current market price. Our estimate is based on a 7x forward expected adjusted earnings of $3.28. Walgreens expects its adjusted earnings to be in the range of $3.20 and $3.35 in 2024. The 7x P/E multiple is slightly below the 9x average over the last four years. A slight decline in valuation multiple seems justified, given the near-term headwinds from weakening consumer demand and a fall in profitability amid impairment charges associated with its recent acquisitions. We will revise our estimates post the Q3 earnings release.

Looking at the previous quarter, Walgreens’ Revenue rose 6.3% y-o-y to $37.1 billion, primarily driven by a 33% rise in the U.S. Healthcare revenues, amid Summit Health and Village MD acquisitions. The U.S. Retail pharmacy continued to benefit from higher branded drug price inflation. Walgreens saw its adjusted operating margin contract by 100 bps to 2.2% in Q2’24. This resulted in the company’s bottom line expanding slightly to $1.20 on an adjusted basis, versus $1.16 in the prior-year quarter.
Coming to the latest quarter, we expect revenues to be around $36 billion, aligning with the consensus estimate. Walgreens should continue to benefit from drug price inflation and growth in its pharmacy services. The company is focused on cost-cutting and has taken initiatives to achieve $1 billion in savings this year. However, despite these efforts, the company is expected to post a 25% y-o-y decline in adjusted earnings to $0.75 per share in Q3.

Overall, we think Walgreens will post an upbeat Q3, and it will likely have more positives to look forward to on the back of stable sales growth and cost-cutting initiatives, boding well for its stock.

While WBA stock looks undervalued, 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 Jun 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 WBA Return -2% -39% -81%
 S&P 500 Return 4% 15% 144%
 Trefis Reinforced Value Portfolio 2% 7% 657%

[1] Returns as of 6/24/2024
[2] Cumulative total returns since the end of 2016

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