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What’s Up With Walgreens?

By Jim Pearce on April 18, 2018

What if I told you that you could buy a stock today that is, (1) trading at only 11 times this year’s earnings; (2) paying a forward annual dividend yield of 2.5%; (3) grew revenue by 27% during its most recent quarter; and (4) its largest potential competitor just decided it is not going to get into this company’s business?

Sounds enticing, right? Now, suppose I told you this company is PF Growth portfolio holding Walgreens Boots Alliance (NasdaqGS: WBA), the retail pharmacy chain that until this week was considered by many to be Amazon’s next victim? Hmmm… perhaps you’d like to ponder that a moment before hitting the ‘Buy’ button at your online brokerage account to scoop up shares while they’re cheap.

That’s the problem for Walgreens. Despite being a value investor’s dream, it can’t shake the perception that another shoe is about to drop. Consider the string of exogenous events that have dogged Walgreens over the past two years:

  • First, it was Great Britain’s decision to exit the E.U. in June 2016 that killed Walgreens’ upward momentum (Walgreens is headquartered in Illinois but owns extensive operations in England and Europe).
  • Next, it was a rumor six months ago that Amazon was contemplating entering the online pharmacy business that sent Walgreens’ share price reeling. WBA dropped from above $80 to below $65 in just six weeks. However, as it became apparent that Amazon was not an immediate threat to its business, its share price rallied all the way back to $80 by late January.
  • Finally, the threat of a trade war with Asia and Europe not only drove the entire stock market into correction territory over the past three months, but was particularly punishing for Walgreen’s given its dual geographic identity. By last week, it was trading below $65 again.

However, some unexpected good news arrived this week, bumping up WBA more than 6% during intraday trading on Monday. CNBC reported that Amazon has abandoned its plan to enter the hospital pharmacy business due to logistical and marketing challenges.

Underloved and Undervalued

With Amazon out of the way, it is entirely possible that none of those threats will end up having a material impact on Walgreens’ future profitability. If so, then it should only be a matter of time, and not a lot of it, until its share price rises back to the $80 level. That would represent a better than 20% gain from where it was trading earlier this week.

Income investors should be happy about the dividend hike the company’s board of directors announced last week. In June, Walgreens will pay a quarterly dividend of 40 cents per share, an increase of nearly 7%. For the record, that means 2018 will be the 42nd consecutive year that Walgreens has raised its dividend.

Growth investors should be encouraged by the fact the company raised its guidance for the remainder of 2018 two weeks ago. Walgreens now expects its adjusted diluted EPS (earning per share) to come in between $5.85 to $6.05. If so, then its PEG ratio (PER to earnings growth) of 0.92 falls below the 1.0 limit that growth fund guru Peter Lynch used with great success to identify undervalued growth stocks.

Day of Reckoning on the Way

All of which begs the question, what is it going to take for investors to embrace Walgreens again?

I don’t know, but sooner or later the discrepancy between Walgreens’ superior fundamentals and its lagging share price must be reconciled. Since I continue to hold it in the Personal Finance Growth portfolio, I clearly believe it is going to make a move to the upside. But given the relatively minor move it made in response to the Amazon news, some other catalyst will have to spark more buying interest in the stock for it get moving.

 


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  1. avatar
    PeterWolf Reply April 23, 2018 at 5:08 PM EDT

    CVS the main competitor of WBA has a 3+% yield and lower valuation; so why should not WBA continue to fall to around $55 to match its main competitor’s metrics ?