Walgreens Boots Alliance (NASDAQ:WBA) was ‘booted’ from the Dow Jones Industrial Average earlier this year. Since the news broke, shares are down close to 30%, dividends included on the $14 billion market cap Drug Retail industry company. While getting cut from the DJIA roster is sometimes seen as a contrarian buy signal, that old Wall Street wisdom has not held true for WBA. And with meager EPS growth in the coming quarters and troubles regarding Boots, its drugstore that has been whispered to be an IPO candidate, there are clearly fundamental headwinds.
I reiterate a hold rating. I last reviewed WBA in November 2023. The stock is down 22% total return in that span, producing about 40 percentage points of negative alpha compared to the broader market, despite a pair of operating EPS beats. Getting kicked out of the Dow and the canceling of the Boots IPO are key bearish catalysts in that span.
WBA Underperforming the DJIA Since February
According to Bank of America Global Research, Walgreens, following the completion of the Rite Aid stores acquisition, is the largest global pharmacy, with nearly 10,000 stores in the US alone. The company also operates an international pharmacy business, primarily composed of the Boots pharmacies in the United Kingdom. Walgreens is headquartered in Deerfield, Illinois.
Back in March, WBA reported a decent quarterly report. Its Q2 2024 adjusted operating EPS verified at $1.20, significantly above the $0.82 Wall Street consensus target. Revenue of $37.05 billion was also a significant $1.22 billion beat. The management team narrowed its FY 2024 adjusted EPS guidance to be in the range of $3.20 to $3.35, down from $3.20 to $3.50. Citing a weak macro environment and the end of its sale-leaseback program, along with soft performance from its Cencora position, the firm was not all that optimistic about the balance of the year.
The company continues to seek to monetize its non-core assets and reduce debt rather than buy back shares, given its soft cash-flow reality. Still, better profitability out of its US Healthcare unit is an upside risk to earnings. Decent sales trends internationally could also be a bullish risk to my hold rating. A further deterioration in overall cash flow trends, including a cut to the dividend, is a material bearish risk.
Ahead of earnings later this week, the options market has priced in a historically high 6.8% earnings-related stock price swing when analyzing the at-the-money straddle expiring soonest after the report, according to data from Option Research & Technology Services (ORATS). Analysts expect $0.72 of non-GAAP EPS. As for the quarter to be reported, with the company focusing on cost-cutting efforts, I expect a solid earnings number, but be sure to watch the top line - a miss there would signify larger fundamental problems in my opinion. I would be encouraged to see positive changes to its new pharmacy reimbursem*nt models along with ideas around how it might plan to re-engineer its US Healthcare inroads and initiatives. There is headline risk considering that the consensus EPS estimate calls for a 28% yoy decline. Considering that shares are down 26% since the previous earnings report, a lot of negativity has been priced in.
On earnings, analysts at BofA see current-year operating EPS falling sharply this year but growth is expected to return in the out year through 2026. The Seeking Alpha consensus forecast calls for comparable earnings trends with WBA’s top line rising at a decent clip in the low to mid-single digits over the next two years. The result is a very low price-to-earnings multiple of about 5x.
Dividends, meanwhile, are expected to hold near $1 per share after the payout was cut just recently. What’s encouraging, however, is that free cash flow is forecast to be healthy with WBA, evidenced by a high free cash flow yield. But if we see further operational challenges, then those loft FCF estimates could be trimmed. We’ll know more later this week on that front.
Walgreens Boots Alliance: Earnings, Valuation, Dividend Yield, Free Cash Flow Forecasts
Given the most updated earnings estimates, if we assume normalized EPS of $3.30 and apply the stock’s 5-year multiple of 8.4, then a fair value would be about $28. Given the long-term challenges facing WBA’s retail pharmacy business, a reduced P/E is required in my view. Reducing the earnings multiple by 2 turns is appropriate, and that results in a fair value of $21, about $5 above where the stock sells for today. But there’s more to the story here, given weak momentum trends and an uncertain fundamental outlook.
WBA: A Value Case, But A Potential Value Trap
Compared to its peers, WBA features a strong valuation, which I generally agree with today, but its growth trajectory is as poor as it gets. Moreover, profitability trends have deteriorated and sell-side earnings revisions have followed suit. Finally, share-price momentum remains particularly soft, and I will detail why waiting for a more favorable risk/reward entry is prudent with WBA today.
Competitor Analysis
Looking ahead, corporate event data provided by Wall Street Horizon shows a confirmed Q3 2024 earnings date of Thursday, June 27 BMO with a conference call immediately after the numbers hit the tape. You can listen live here. No other volatility catalysts are seen on the calendar.
Corporate Event Risk Calendar
The Technical Take
While the current earnings multiple suggests WBA is a bargain, the technical situation warrants major consideration. Notice in the graph below that shares remain mired in a steep downtrend. There could be some support near current levels where a downtrend line comes into play, but with key resistance just under the $20 mark and a steeply falling long-term 200-day moving average, the bears control the primary trend.
Also take a look at the RSI momentum oscillator at the top of the chart – it’s been ranging in the notoriously bearish 20 to 60 zone, further underscoring the reality that WBA’s technical situation is precarious (to put it mildly). I’d like to see WBA rally through $20 to help support an end to the downtrend. Conversely, if we see a high-volume selling event, perhaps post-earnings, then that could warrant a long contrarian play.
Overall, while WBA could bounce at the downtrend support line here, resistance is heavy up to the $20 mark.
WBA: Sharp Downtrend, Bearish RSI Trends, $20 Resistance
The Bottom Line
I do like WBA’s valuation, but its firm downtrend and protracted relative weakness to the broader market are simply factors that are too big to overcome at this time. I reiterate a hold rating.
Mike Zaccardi, CFA, CMT
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