Is Walgreens Stock Undervalued At $32?

After a 14% fall in Walgreens stock (NYSE: WBA) this year, underperforming the broader S&P500 index, which is up 8%, we believe it is undervalued. Looking at a slightly longer term, WBA stock is down 46% from levels seen in late 2019. This can be attributed to 1. the company’s P/S ratio falling a significant 48% to 0.3x trailing revenues, partly offset by 2. Walgreens’ revenue growth of 5% to $110 billion over the last twelve months, and 3. a 0.4% fall in its average total shares outstanding to 863 million. Our dashboard on Why Walgreens Stock Moved has more details.

Walgreens’ revenue growth over the recent years was driven by increased demand for Covid-19 testing and vaccine administration. The sales peaked at $112 billion in fiscal 2021 before falling slightly to $110 billion now due to a decline in Covid-19-related demand. The company is expected to see a rise in footfall at stores, prescription volume, and average revenue per prescription to trend higher, aiding its sales growth. For the six months period ending February, Walgreens saw a 2.3% fall in prescription volume, but this includes the Covid-19 vaccination prescriptions. The company plans to offer primary care at its stores, which will likely fuel its top-line growth. On those lines, it acquired a majority stake in VillageMD to provide primary care at hundreds of locations in the next two years.

Although the company has been able to grow its sales, its operating margin has contracted to 2.0% in 2022, vs. 5.8% in 2019, due to rising costs, and this has weighed on its stock price growth in the recent past. The operating margin plunged to -6.0% for the last twelve months due to a $7 billion charge to resolve most of its opioid-related lawsuits. Our Walgreens Operating Income Comparison dashboard has more details. Now, with the VillageMD acquisition, the company is looking forward to $1 billion in cost synergies in the next two years, and it will likely see a rebound in operating margins in the coming years.

Looking at its stock price, we estimate Walgreens’ valuation to be $39 per share, reflecting a 23% upside from its current level of $32. WBA stock is trading at 7x forward expected earnings of $4.55 on a per-share and adjusted basis for fiscal 2023, compared to the last three-year average of 9x, implying it is undervalued. Even if we look at valuation from a P/S perspective, WBA looks undervalued. It is currently trading at 0.25x trailing revenues, compared to its last three-year average of 0.33x. Our Walgreens Valuation Ratios Comparison dashboard offers more details.

While WBA stock may see higher levels, the Covid-19 crisis has created many pricing discontinuities, which can offer attractive trading opportunities. For example, you’ll be surprised by how counter-intuitive the stock valuation is for Walmart vs. VMWare.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

[1] Month-to-date and year-to-date as of 5/18/2023
[2] Cumulative total returns since the end of 2016

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