It is, perhaps, not too surprising that while the rest of the market has been plagued by fear and uncertainty coming from the increasing spread of coronavirus and questions about the efficacy of government responses, there have been a few pockets of opportunity to be had. One of those is in stocks like Gilead Sciences (GILD), who have been working to fast-track the development of drugs originally designed for other applications but that offer effective potential means of treatment.
Does that mean that in the weeks or months ahead, one of the good places to think about putting your money is in the stocks that will help provide those drugs to consumers? Pharmacy stocks like CVS and Walgreen’s Boot Alliance (WBA) haven’t been immune from the market’s volatility; in fact, WBA has declined in value by about -17.5% year to date, hitting a new multiyear low around the end of the week.
WBA is a company that has been challenged on multiple fronts, as companies like CVS have made ambitious moves to diversify their businesses, and AMZN has reportedly been making detailed plans to provide its own pharmacy service. Its response was to expand, acquiring 1,932 Rite Aid stores last year to drive revenue and earnings growth. In some areas, the result is impressive, such as growth in Free Cash Flow. In others, question marks remain, including the massive debt load the company assumed in order to complete last year’s acquisition. At the same time, the stock is also trading at a discount that might offer the potential for useful value. Is it worth your time as a long-term, bargain basement buy?
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 $43.1 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; but it also marks an improvement from late 2019 of a little under $1 billion, and translates to a Free Cash Flow Yield of about 11.5%.
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 3.97% 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, there is a risk that management may been forced to reduce or possibly even suspend its dividend.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target at about $60 per share. That means the stock is trading at a useful discount, with about 23% upside from the stock’s 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 dropped back to a new low at $51, then attempted another short-term rally that failed in early February before dropping to a new multiyear low around $44.50. Immediate resistance is around $51, with closest support is at that $44.50 low. A push above $51 could see the stock rally to about $54, while a break below $44.50 could see the stock drop back to levels not seen since early 2013 in the $40 to $41 range.
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 also doomed; but along with its current bearish momentum, it does mean that the best probabilities for success lie with short-term bearish trades. If the stock drops below $44.50, consider shorting the stock or working with put options, with an eye on a profit target around $40 to $41 per share. If the stock’s current bullish momentum continues and pushing the stock above $51, consider buying the stock or working with call options with $54 offering a quick-hit exit point.