Updated: Nov 27, 2020
"An under-appreciated stock that has been written off but they are taking the right steps such as their primary care strategy to build long term value to those that are patient."
Finding value is not as simple as picking a stock that has a low P/E multiple, you need to find a diamond in the rough, a stock that's price does not fundamentally match its true value. To find a good value stock you need to take the time and see where the company is going, its upside potential and for me, the importance of having a good dividend payment that is not only safe but will likely grow over time. Today I believe I have found a potential deep value candidate in Walgreens Boots Alliance. A stock that has a long history of generating profits and providing dividend growth as well as a proven business model albeit one that is challenged.
Walgreens Boots Alliance
Walgreen Boots Alliance (WBA) is commonly known for its pharmacy retailer business but they have also been slowly pushing their primary care strategy in order to become a health and wellbeing company. WBA currently operates through three segments: Retail Pharmacy USA, Retail Pharmacy International, and Pharmaceutical Wholesale. With around 10,000 locations in the USA this is a company that has an incredible footprint and loads of opportunities so let's see what has happened.
Walgreens has had a tough couple of years with declining retail traffic, lower prices for generic drugs as well as reimbursement rates. Competition has also intensified not only from Amazon (AMZN) and Walmart (WMT) for online purchases but also from newer digital pharmacy startups as well. The market in fact crushed the share prices of both Walgreens and CVS when Amazon bought online pharmacy PillPack for $753 million in an effort to crack open the multi-billion dollar medication market. It also does not help when you see Walmart also pushing more into health-care as well by its recent plan to open at least six more health clinics in the greater Atlanta area by the end of 2020.
Stiff competition, falling profits in prescription drugs, and now COVID-19 has taken a toll on this company. COVID-19 adversely impacted sales by approximately $700 million to $750 million. This was almost entirely from the company's non-U.S. businesses in the UK. It has seen its share price continually languishing and has recently been hitting new 52 week lows.
“Ongoing margin pressures along with uncertainty around Covid-19 recovery will continue to pressure the stock, UK Boots will likely be a drag on the company for the remainder of the year as well.”
Last Quarterly results
The company announced third-quarter non-GAAP earnings of 83 cents per share, well short of the consensus of between $1.19 - 1.22 per share. However, Walgreens did report sales of $34.6 billion for the quarter, up 1.2% on a constant-currency basis, from the same quarter last year. Operating losses for its international pharmacies reached $2.2 billion, mostly from the $2 billion impairment charge taken.
Looking for the remainder of the year, Walgreens issued adjusted earnings per share guidance for its 2020 fiscal year of between $4.65 and $4.75, which was again below expected estimates of around $5.49.
What was clear with the last quarterly results is how adversely affected the company was from its UK/International retail pharmacy division. With sales falling 31.5% for their international division, this was clearly not something to be happy about. There were a few positives such as US retail pharmacy sales up 3.2% while the company’s Pharmaceutical Wholesale division was up 0.6%.
This was clearly a bad report with a few positives, first Walgreens US pharmacies held up well given the situation and while their international division was something to forget about, there is a plan to eliminate 4,000 positions in its Boots chain or 7% of the company's workforce. However, Walgreens appears to be challenged with its UK chain and really needs to find a way to right-size this segment.
“CEO Stefano Pessina said: Prior to the pandemic our financial performance for fiscal 2020 was on track with our expectations. However, this unprecedented global crisis led to a loss in the quarter as stay-at-home orders affected all of our markets.”
This has not been a pretty year for the pharmacy chain Walgreens Boots Alliance. The company has lost about a third of its value as weaker-than-expected earnings have dampened investor optimism and the COVID-19 pandemic has hindered foot traffic into its stores. But while short-term investors see woe, I view Walgreens at roughly $40 a share as a massive opportunity for income seekers.
Secular trends are on Walgreens side, First, with an aging population in the US and Europe, more medications will need to be distributed and dispensed for years to come. Statista shows the number of prescriptions to be filled annually will increase significantly from an estimated 4.55 billion in 2020 to almost 5 billion prescriptions by 2025. That's an annual growth of 100 million per year. To me, there are plenty of opportunities for not just Walgreens but competitors as well.
Secondly, Walgreens has not been sitting ideally by, they have taken a number of steps to help improve their position in retail while cutting costs such as.
Walgreens set up a partnership with FedEx (FDX) to provide package drop-off and pickup service in Walgreens stores. Recently the service was expanded to allow online returns in Walgreens stores.
Walgreens and Kroger
Expanding its partnership with America's largest grocery chain, Kroger, to 35 stores in order to sell Walgreens' beauty products. They have also partnered with Kroger to form a group purchasing organization, called the Retail Procurement Alliance that is designed to improve their purchasing power while lowering costs through scale.
Transformational Cost Management Program
Walgreens is looking to squeeze more with less by cutting costs. They are currently on track to deliver in excess of $1.8 billion in annual cost savings by fiscal 2022. More recently they announced the closing of 200 stores across the USA or approximately 3% of its footprint.
Walgreens announced a partnership with DoorDash to deliver over-the-counter medication and other products from the drugstore chain. The service will be launching in the Chicago, Atlanta, and Denver areas, with plans to expand to other markets throughout the summer.
“More recent partnerships are finally showing Walgreens is being adaptive and focusing on healthcare to help adapt to the changes occuring in health care delivery.”
Walgreens like CVS are both well ahead of the competition when it comes to Health care. Some analysts miss the fact that Walgreens is looking seriously at Health Care with over 400 Walgreens Healthcare Clinics located throughout the U.S. to handle simple diagnoses and vaccines such as flu shots. Additionally, Walgreens is taking its time by testing out other types of services with Humana and UnitedHealthcare but there is no question the VillageMD deal is the right long term move.
Humana and Walgreens are opening three additional partners in primary care centers inside Walgreens. This is to expand their senior-focused neighborhood health collaboration to provide full-service primary care, pharmacy, nutrition, and wellness support and other services for Medicare beneficiaries.
Walgreens and UnitedHealthcare are opening 14 UnitedHealthcare Medicare services centers within Walgreens stores in five metropolitan areas as part of a multi-year agreement.
Walgreens and VillageMD have a deal to open approximately 500 to 700 doctor offices in drugstores over the next five years. Most of the primary-care clinics will be around 3,300 square feet. This is about a quarter of the size of Walgreens’ average store but will likely mean more revenue per square foot. What stood out with this deal is the fact that more than half of these offices will be in areas with a shortage of health professionals or that’s underserved. These are not small clinics and will provide a wide range of medical services from annual checkups to walk-in appointments. There will be around nine exam rooms, a waiting area, and a small four-person physician-led staff that coordinates with the Walgreens pharmacists. I did read that some of these offices will be as large as 9,000 square feet.
These are not all of the initiatives
Walgreens and Jenny Craig have an agreement to open 100 Jenny Craig at Walgreens locations nationwide in 2020. As well as the Walgreens Boots Alliance (Nasdaq: WBA) and McKesson Corporation (NYSE: MCK) agreement to create a joint venture to combine their pharmaceutical wholesale businesses in Germany, Alliance Healthcare Deutschland, and GEHE Pharma Handel. WBA will have a 70% controlling equity interest in the joint venture and McKesson will have a 30% ownership interest.
The company raised quarterly dividends by 2.10% to .4675 cents per share. This makes it the 45th consecutive year for WBA to raise the dividend and continues to be a Dividend Champion. Better yet you can find that over the past decade, Walgreen’s has grown its dividends at an annualized rate of 13.60%. However we do see that over the last five years the annualized growth rate is only 6.60%, but this is still respectable.
“It's only a matter of time before they find the right mix to expand sales and margins.”
Is Walgreens stock a buy?
This is a company that in my opinion has been crushed and is currently hovering around the $34 to $35 range. Remember this was a stock that was getting up to the high 80's to 90's just a few years ago. I am not a chartist. I just look at the fundamentals of the company and I see this company as a viable long-term investment. There is no question the stock does deserve to be much lower due to the number of issues explained in the article. However, looking forward, the company is trying to find the right mix to improve profitability. I think moving more into healthcare through initiatives such as VillageMD is the right move going forward. I also think the layoffs and other costing cutting initiatives will also help improve profitability especially in the UK which is badly needed.
Given its current share price, the bad news is priced in and profitability at some point will return, Walgreens will be a tough stock to own over the short to mid-term but in the long term through their initiatives will help WBA return to profit growth. This is a company that will easily survive the current pandemic and will be well-positioned to succeed. This could be a stock worth buying at current prices and potential investors should take the time and see if it should be added to their portfolio.
Final Note, John Standley the former Rite Aid CEO, who led the company during two failed mergers, one being with Walgreens was recently named the new president of Walgreens. This was a little surprising and somewhat disappointing. I am not sure if he was the best choice given the terrible results in stock price and failed merger talks during his tenure at Rite Aid. This announcement may have contributed to the additional leg down on Walgreens. Although the news gave me some pause, I still believe Walgreens is not a value trap and could be worth buying at these levels.
We take pride in ensuring that we look at ESG when reviewing stocks . Looking at Walgreens (WBA) we avoid the ESG ratings and always take the time and look for ourselves to see a company's initiatives and governance, which can be found here. Where Walgreens shines is its commitment to diversity, this has been reflected in a number of awards given to the company over the last decade. We also particularly like Walgreens policy for persons with disabilities as well as Veterans. For example, Walgreens Veterans Network Business Resource Group (BRG): A grassroots network of current Walgreens team members, comprising of former military service members, This BRG offers networking, peer mentoring, professional development, and community service opportunities, to help Walgreens build upon a deeply rooted tradition of supporting those who have served. For those that are focused on ESG, do your homework and review all the ESG activities Walgreens is taking.
Disclosure: mysmallbank.com nor the author received any compensation from the mentioned security for this article. The article is our opinion only and is written to help readers learn more about the stock mentioned in this article. Consider this as basic information only and utilize professional services and additional sources before making an investment decision.