Stock of the Week

Walgreens

October 19th 2020

Walgreens Boots Alliance
NYSE Symbol: WBA
Industry: retail pharmacy
Price as of 10/16/20: $37.41

 

After a 10% correction in the month of September, the major averages have rebounded to start the fourth quarter. October is historically the start of the best six months of the year for the major averages. Since March, the market rally has been led by tech and COVID related stocks. For the rally to continue, the rally should broaden out to small/med cap stocks along with sectors that have been left behind. The Russell 2000 is up 12% from the September lows trading at an eight-month high. This week we will highlight a Dow component that is a consumer discretionary stock. The featured stock of the week is Walgreens Boots Alliance. The economic shutdown has not helped Walgreens as their stock is down 35% year to date. But better than expected earnings could be a signal that things are improving. A cheap valuation and a 5% dividend yield could provide good upside for Walgreens shareholders as the global economy recovers from the pandemic.

Walgreens is the largest U.S. pharmacy chain with roughly 9,000 locations. Last week they reported earnings of $373 million as revenue rose 2% to $34.75 billion. The company's U.K. business continues to struggle, with retail sales down 29% in the quarter, but U.S. retail-pharmacy business climbed 3.6%. Comparable U.S. store sales rose 3.6% in the quarter.

Going forward, similar to CVS, Walgreens is looking to transform and modernize their stores. Walgreens will leverage their investment in VillageMD with plans to open 500 to 700 full-service doctor offices over the next five years in their stores. The move to shift some retail space into medical services has several rationales. For Walgreens and CVS, front-of-store sales have long been under pressure as Amazon and other online retailers reduce trips to the store. Providing medical services can build loyalty and keep people coming to the drugstore. On top of that, the companies expect their business models to help lower overall health care costs by avoiding care in the emergency room.

In the meantime, the stock looks attractively priced. Walgreens currently trades for 8 times reduced earnings estimates, just 0.2 times sales and 1.5 times book value of $23.84 a share. The company does have a lot of debt at $41 billion, but the company generates $5 billion in cash flow a year to pay down the debt and continue to pay their generous 5% dividend. Walgreens does anticipate the COVID pandemic to continue to impact earnings into the first half of 2021, but investors with a long-term perspective could see good capital appreciation with a great dividend while they wait for the fundamentals to improve.