WBA has too much debt to be a good value

One of the interesting headlines I noticed yesterday in market news was that Amazon.com (AMZN) had filed paperwork for international trademarks on “Amazon Pharmacy.” The Pharmacy industry is one that I like to think of as a good, conservative industry when the market could be reaching a period of increasing uncertainty and concern about a potential reversal. And while a lot of opinions right now are focusing on easing global trade pressures as a catalyst to growth through most of the rest of this year at least, I think that what looks like an increasing appetite for risk – meaning that investors are increasingly willing to buy stocks at extremely elevated levels – could be a leading, contrarian indicator about the potential for a market reversal.

Over the last year or so, the Pharmacy industry’s status as a defensive-oriented target for conservative investors has been challenged a bit, both by legal pressures from a political push for drug reform and the disruptive prospect of AMZN’s entry into the industry. In similar fashion as their acquisition of Whole Foods created pressure and tension for food companies, grocery stores and big-box retailers alike, the news that Amazon is interested in the pharmacy business – not a new headline, by the way – is something that at a couple of different points has created volatility for stocks throughout the industry. That includes Walgreen’s Boots Alliance (WBA), one of the biggest and most recognizable names in the industry. This is one of two major players, with CVS Health Corporation (CVS) that have been making big moves over the last couple of years. It’s a stock that has been deeply out of favor with investors, though; from a high at the beginning of 2018 at around $86.50, the stock dropped all the way to a multiyear low at around $49. The stock rebounded a bit from September to the beginning of December, hitting a near-term high at around $63 before dropping back to its current level a bit below $54 per share. Does that make the stock a good bargain right now? Let’s find out.

Fundamental and Value Profile

Walgreens Boots Alliance, Inc. is a holding company. The Company is a pharmacy-led health and wellbeing company. The Company operates through three segments: Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale. The Retail Pharmacy USA segment consists of the Walgreen Co. (Walgreens) business, which includes the operation of retail drugstores, care clinics and providing specialty pharmacy services. The Retail Pharmacy International segment consists primarily of the Alliance Boots pharmacy-led health and beauty stores, optical practices and related contract manufacturing operations. The Pharmaceutical Wholesale segment consists of the Alliance Boots pharmaceutical wholesaling and distribution businesses. The Company’s portfolio of retail and business brands includes Walgreens, Duane Reade, Boots and Alliance Healthcare, as well as global health and beauty product brands, including No7, Botanics, Liz Earle and Soap & Glory. WBA has a current market cap of $47.7 billion.

Earnings and Sales Growth: Over the last twelve months, earnings declined by a little over -6%, while sales increased about 1.6%. In the last quarter, earnings dropped by -4.2% while sales were also modestly higher, by 1.13%. The company’s margin profile is very narrow; over the last twelve months Net Income was 2.69% of Revenues, and narrowed somewhat to 2.46% in the last quarter.

Free Cash Flow: WBA has free cash flow of a little over $4.7 billion over the last twelve months. This number has declined from August of 2018, when it was about $6.9 billion. That translates to a Free Cash Flow Yield of about 9.78%.

Debt to Equity: the company’s debt to equity ratio is 1.34, a high number that is reflective of the company high debt load. Long-term debt jumped from $11 billion in August of last year to more than $32 billion in the last quarter. By comparison, their balance sheet shows only $811 million, meaning that both management’s ability to service their debt as well as liquidity is a concern.

Dividend: WBA pays an annual dividend of $1.83 per share, which translates to an annual yield of 3.36% at the stock’s current price. Management has increased the dividend over the last year, which most investors would mark as a positive; but given the concerns I’ve just outlined, I think WBA’s dividend is at risk.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for WBA is $27.45 per share. At the stock’s current price, that translates to a Price/Book Ratio of 1.96. This is below the stock’s historical average of 2.62. A rally to par with the historical average would put the stock’s price at about $72 per share, which is more than 33% above its current price.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: WBA’s downward trend started in December of 2018 before dropping to about $49 in September of last year. The stock rallied to the 38.2% Fibonacci retracement line in early November, at about $63 per share. From that point, the stock has dropped back to its current price a little below $54. Immediate resistance is around $59, but the stock’s current momentum is strongly bearish. Closest support is at about $52. A drop below that level should see the stock test its multiyear low in the $49 area.

Near-term Keys: WBA’s valuation metrics look very tempting right now; but despite some interesting strengths including Free Cash Flow and stable (albeit narrow) margin profile, the company’s massive debt load looks like the kind of thing that has ultimately doomed some of the most established, recognizable retail names in the United States over the last few years. That doesn’t mean WBA is doomed; but along with its current bearish momentum, it does mean that the best probabilities for success lie with short-term bearish trades. A continuation of the stock’s present momentum could offer an interesting opportunity to short the stock or work with put options, with an eye on $51 as a quick profit target, or even $49 if the stock pushes below that point. A bullish trade, even on a short-term basis right now would be considered extremely speculative, as would any kind of long-term bet on the company’s value proposition.


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