$WBA: Post-Recovery Plan Spike – A Buy Opportunity or Risky Bet?
Stocks dropped on Friday after a hot jobs report dampened Wall Street’s expectations for more interest rate cuts from the Federal Reserve this year.
$.DJI(.DJI)$ lost 696.75 points, or 1.63%, to close at 41,938.45. $.SPX(.SPX)$ slid 1.54% to 5,827.04, while $.IXIC(.IXIC)$ fell 1.63% to 19,161.63. Friday’s losses pushed the major benchmarks into the red for 2025.
The best-performing concepts is Independent Drug Retail.
Considering the different perceptions of the stock, this time TigerPicks chose $Walgreens Boots Alliance(WBA)$ to have a fundamental highlight to help users understand it better.
$Walgreens Boots Alliance(WBA)$
Walgreens Boots Alliance is a global leader in retail pharmacy, dedicated to championing the health and well-being of every community in America. Operating in the healthcare sector, WBA's core businesses include retail pharmacy USA, retail pharmacy international, and pharmaceutical wholesale.
The company operates through its renowned retail pharmacy brands, and provides a wide range of consumer goods and services, pharmaceutical distribution, and health and wellness products, making it an integral part of the healthcare ecosystem.
Shares are down >65% on a total return basis — WBA does pay a dividend of $0.25 per quarter, which currently yields 11% per annum. However, they are buoyant today — up 27% at the time of writing, to a value of $11.75, after the company released its fiscal year 2021 quarter 1 earnings and business updates.
Walgreens smashed analyst's expectations for revenues, reporting a figure of $39.5bn, up 7.5% year-on-year, against Wall Street's consensus estimate of ~$37.4bn. Earnings per share (“EPS”) came to $0.51 on an adjusted basis, and $(0.31) on a GAAP basis. The company maintained its FY25 guidance for EPS of $1.4-$1.8, which represents a forward price-to-earnings (“P/E”) ratio of ~7.5x.
Keep Share Price Buoyant?
While higher medical utilization might seem beneficial to a company like Walgreens, the company has been protesting about the unfair reimbursement deals it has been pushed into, which is making its business unprofitable, so it seems, despite more and more money flowing to the industry's top line, it is being lost before it reaches the bottom line.
This is clearly not a recipe for share price outperformance. However, coming from such a lowly position, Walgreens may be positioned for further share price recovery in 2025, if it can stick to its plan, while other companies are still drawing up their recovery plans.
Walgreens told analysts on today's earnings call that its U.S. retail pharmacy business is its priority. The company says it has a dedicated team in place to ramp up sales of its retail stores. However, cash-strapped consumers and a shift to online has led to underperformance. On a more positive note, Walgreens CEO Tim Wentworth told analysts:
Clearly, analysts liked what they heard on the earnings call, as well as the revenue outperformance, and the promise of adjusted positive EPS at the end of fiscal year 2025. Over the course of the year, CVS seemingly expects to sell its Village Medical business — responsible for the $12bn goodwill writedown in 2024, and potentially Summit City as well.
Is Surge For Long-Term Recovery?
Walgreens' upbeat earnings represent an excellent start to the year for the beleaguered company. I have made the argument that its “first mover advantage” adapting to the new healthcare industry reality could support an ongoing recovery in Walgreens' business, share price, and market cap valuation, presently just $10.2bn.
Throw in a dividend yield of >10% and investing in Walgreens feels like a calculated risk potentially worth taking. The demand for Walgreens' services, retail stores aside, appears to be as strong as ever. The key to unlocking value is whether management can ease operational inefficiencies, begin driving positive cash flow, and secure the deals it needs from the government and health insurer clients that will help turn losses into profits.
On balance, I'll award Walgreens stock a “Hold” rating on this occasion, as the overall economic environment threatens to be turbulent in 2025, and management's turnaround plans are closer to the beginning than the end. So early in 2025, the reality may be that “we don't know what we don't know” about how the healthcare industry will fare in 2025, and whether it will be the government, health insurers, pharmacy operators, or patients who benefit most.
If Walgreens can post second, third, and fourth quarter 2025 earnings as competitive as Q1, without any major write-downs or losses, and boost its debt leverage with some sales of the businesses it no longer wants to be in, then the share price may well have a strong year. However, the overall recovery process will take many years, and there is no guarantee it will be wholly successful.
As such, I'd advise maintaining a watching brief at this time. If Walgreens does enjoy a strong year, investors may miss out on some initial gains. However, with stock so significantly discounted - price to sales ratio is ~0.25x - there ought to be much more growth to capitalize upon in the longer term.
Stock Price Forecast:
Here are the target price forecasts for the next 12 months from analysts.
Based on 13 Wall Street analysts offering 12 month price targets for Walgreens Boots Alliance Inc. in the last 3 months. The average price target is $10.21 with a high forecast of $15.00 and a low forecast of $7.00. The average price target represents a -13.18% change from the last price of $11.76.
Resource:
https://seekingalpha.com/article/4748804-walgreens-share-price-spike-on-recovery-plan-success-may-be-sustainable
What are your thoughts on $Walgreens Boots Alliance(WBA)$ ?
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