Walgreens: Pain Eases, but It’s a Far Cry from Recovery

• Walgreens stock is underperforming and is trading at a low valuation.
• Despite this low valuation, the stock’s recovery could take time.

Walgreens Boots Alliance (WBA) stock has taken a beating so far this year and is significantly underperforming. It’s down about 27% YTD (year-to-date) as of August 28. During the same period, the S&P 500 has risen 15.2%.

Given its steep decline, WBA has a very low valuation. It’s trading at 8.3 times its fiscal 2020 estimated EPS of $6.01. The company’s current valuation is about 41% lower than its four-year average of 14.2x.

Owing to this recent decline and low valuation, we believe the pain is likely to ease for Walgreens stock. To put it simply, the downside seems limited. Also, the company’s current dividend yield of 3.6% looks attractive, and it continues to repurchase shares, boosting shareholder returns.

Walgreens is also reviewing its retail footprint and optimizing its stores. The company recently announced the closure of 200 underperforming stores in the US. Moreover, it also expanded its partnership with Kroger (KR). As per the announcement, Kroger will open 35 additional Kroger Express stores within Walgreens stores.

Walgreens’s digital transformation and accelerated cost-management programs are also expected to support its growth.

However, this doesn’t indicate that a recovery is in the offing. Walgreens’ top line growth is expected to be in the low single digits, at least in the near term. Moreover, reimbursement pressures and high interest expenses could continue to hurt its EPS. Walgreens also has a significant amount of debt on its balance sheet. At the end of the third quarter, Walgreens’s long-term debt amounted to $12.1 billion. Its short-term debt was $5.5 billion.

Analysts expect Walgreens’s sales growth to remain low. Their consensus estimate indicates a 1.2% rise in the company’s top line in the fourth quarter. Meanwhile, analysts expect 2.7% growth in its sales in fiscal 2020.

Analysts expect Walgreens’s adjusted EPS to continue to fall in the coming quarters. They expect its adjusted EPS to decrease 4.5% in the fourth quarter. Moreover, analysts expect the company’s bottom line to remain weak in the first half of 2019.

Multiple analysts have changed their stances on WBA following the company’s weak financial performance so far this year. Eight analysts recommended “buys” on WBA stock in January. However, in August, only two suggest “buys.” Moreover, 16 analysts had “holds” on the stock in January. Now, 18 recommend “holds.”

Three analysts maintain “sell” ratings on Walgreens stock.

Wall Street had a price of $76.50 on WBA on January 29. However, analysts have lowered their consensus target price significantly since then. They now have a target price of $57.32 on WBA, which implies an upside of about 15% based on its closing price of $49.95 on August 28.