WBA is up 24.5% in the last six weeks. Is it time to buy, or wait for a pullback?

When you look at the past two years of market activity and commentary, it shouldn’t be too surprising to see that stocks in the Health Care sector have drawn a lot of attention from investors and analysts. That includes stocks in the Pharmacy/Drugstore industry; these are names, like Walgreens Boots Alliance (WBA) and CVS Corporation (CVS) that worked actively in the early stages of the COVID-19 pandemic as a critical piece of the testing puzzle, providing COVID-19 testing spaces outside its stores with solutions that included drive-through tests. As vaccine candidates moved from trial to emergency use authorization and to FDA approval, they’ve also provided appointment-based services as a place you could go to get vaccinated.

In the U.S., intense competition over the last few years has spurred major consolidation among recognized national pharmacies, leaving just CVS and WBA standing and looking for ways to innovate to counter not only the competition from each other but also from other companies like Amazon, WalMart, and Costco, to name just a few. That competition has only intensified as Amazon launched its Amazon Pharmacy service in November of last year, providing selected prescription drugs to its based of more than 120 million Amazon Prime members in the United States. CVS is neck-deep in a multi-year effort to renovate and remodel local retail locations into combined pharmacy and health care service centers in the form of MinuteClinic and HealthHUBs. WBA isn’t standing pat either, investing heavily to roll out full-service primary care clinics as part of a partnership with VillageMD, and then upping the ante even more last month when they announced the acquisition of a controlling stake of VillageMD to add that partnership fully into its corporate organization.

Even looking outside the scope of the pandemic, long-term demographic trends are generally favorable for pharmacies, which is certainly a big reason that Amazon, WalMart and Costco have been implementing their own competitive pharmacy services. Continued aging of the Baby Boomer generation, with Generation X following not far behind in the next decade or two, means that demand for prescription drugs and related health care services is expected to only increase. I believe that WBA’s investments in VillageMD, along CVS’ efforts to provide its own, localized services will be a key, long-term differentiator from the likes of Amazon and other newcomers on the national stage. When you add in other fundamental factors like WBA’s long-standing status as a dividend aristocrat (members of the S&P 500 Index that have paid a dividend for 25 consecutive years or more), healthy Free Cash Flow, improving operating margins, it is interesting to look at the stock’s price performance.

WBA’s stock endured a downward trend through most of 2021, falling from a peak in April of last year at around $57 to a low at the beginning of December at around $43.50. From that bottom, however, the stock has staged a remarkable rally, reversing the downward trend and surging about 24.5% as of this writing. That puts the stock within just a few dollars of that April 2021 high. The company also released its latest earnings report at the start of this month, providing the first opportunity to determine if the stock’s rise over the last six weeks has outpaced the stock’s fundamentals, or whether is could still offer a useful value-based opportunity. Let’s dive in to the numbers and see what we can find.

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 $46.9 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased by 37.7%, while sales were -6.63% lower. In the last quarter, earnings improved by nearly 43.6% while sales were -1.05% lower. The company’s margin profile is normally razor-thin, but has showing useful signs not just of stabilization, but strength; over the last twelve months Net Income was 4.76% of Revenues, and strengthened impressively to 10.56% in the last quarter.

Free Cash Flow: WBA has free cash flow of about $4.88 billion over the last twelve months. This number has declined from August of 2018, when it was about $6.9 billion, and $5 billion in the quarter prior. Even with the decline, however, the current number still translates to a healthy Free Cash Flow Yield of 10.39%.

Debt to Equity: the company’s debt to equity ratio is .37, which is a conservative number. Long-term debt in the last quarter was almost $11.2 billion (an increase from $7.9 billion a quarter ago) versus a little more than $4.1 billion in cash and liquid assets. The big boost in liquidity is attributable at least in part to the increase in long-term debt and appears to be tied to the ongoing capital investment required for the buildout of VillageMD clinic services. The company’s strengthening margin profile along with improving liquidity strongly indicates debt management should not be a concern.

Dividend: WBA pays an annual dividend of $1.91 per share, which translates to an annual yield of 3.52% at the stock’s current price. WBA also increased their dividend from $1.87 per share early in 2021 – which is a sign of strength and a confirmation of the company’s status as a Dividend Aristocrat.

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 around $62 per share. That means the stock is nicely undervalued, with about 19% upside from its current price.

Technical Profile

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

Current Price Action/Trends and Pivots: The chart above displays the stock’s price activity over the last year; the diagonal red line traces the stock’s downward trend from a high in April of 2021 at around $57 to its December low at around $43.50. It also provide the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock picked up a lot of bullish momentum from that December low, pushing above all of its major retracement lines. Over the last week or so, the stock appears to have begun to consolidate a bit, with immediate resistance at around $54.50 and current support around $53.50. A push above $54.50 could find next resistance at around $55.50 where the 88.6% retracement line sits, but could test the stock’s 52-week high if buying activity picks up. A drop below $53.50 should find next support at around $52 where the 61.8% retracement line waits, with additional downside to about $51 if bearish momentum accelerates.

Near-term Keys: Even with the stock’s big push in the last month and a half, WBA’s valuation metrics continue to be useful, which means that along with the company’s solid fundamentals, this could be a smart stock with an attractive, stable dividend to pay attention to and consider as a long-term investing opportunity. If you prefer to focus on short-term trades, you could use a drop below $53.50 as a signal to consider shorting the stock or working with put options, with an eye on an initial profit target between $51 and $52. If the stock pushes above $54.50, you could consider buying the stock or working with call options, using the stock’s 52-week high as a possible, useful bullish profit target.