Should You Pick Walgreens Stock At $20?

Walgreens (NYSE:WBA) recently reported its Q2’24 results (fiscal ends in August), with revenue and earnings exceeding the street expectations. The company reported revenue of $37.1 billion and adjusted earnings of $1.20 per share, compared to the consensus estimates of $35.9 billion, and $0.82, respectively. Although Walgreens beat earnings, it narrowed its outlook due to a challenging retail outlook, and also recorded a $5.8 billion impairment charge related to its VillageMD investment. The narrowing of the earnings forecast didn’t sit well with some Wall Street analysts, who lowered their price targets for WBA. This resulted in a 10% fall in WBA on April 1.

Looking at a slightly longer term, WBA stock has suffered a sharp decline of 50% from levels of $40 in early January 2021 to around $20 now, vs. an increase of about 40% for the S&P 500 over this roughly three-year period. However, the decrease in WBA stock has been far from consistent. Returns for the stock were 31% in 2021, -28% in 2022, and -30% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that WBA underperformed the S&P in 2022 and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector including WMT, PG, and COST, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could WBA face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months — or will it see a recovery? From a valuation perspective, we believe WBA stock has room for growth, especially after its recent fall. We estimate Walgreens’ Valuation to be $24 per share, based on a 7x forward expected adjusted earnings of $3.28, slightly below the 9x average over the last four years.

Walgreens’ revenues were up 6% to $37.1 billion in Q2’24, primarily benefiting from its U.S. Healthcare business, rising 33% to $2.2 billion, driven by the VillageMD (including Summit Health) acquisition. U.S. Retail Pharmacy revenue was up 5% to $28.9 billion, and International revenue was up 7% to $6.0 billion. This rise in revenue can primarily be attributed to increased prescription volume and drug price inflation.

The company’s operating margin stood at -35.5% in Q2’24, compared to 0.6% in the prior-year quarter. The sharp fall can be attributed to impairment of goodwill related to VillageMD. The earnings of $1.20 on a per share and adjusted basis was up 3% from $1.16 in the prior-year quarter.

Although Walgreens posted upbeat Q2 results, it narrowed its full-year outlook. It now expects its earnings to be between $3.20 and $3.35 on a per-share and adjusted basis, compared to its prior view of $3.20 and $3.50. The company’s management stated that a weakening consumer spending environment is expected to weigh on its bottom line in the near term. However, we think that much of the negatives are priced in for Walgreens, with its stock trading around $20, just 6x forward estimated earnings of $3.28 per share, at the mid-point of the company’s provided guidance.

While WBA stock looks like it can see higher levels, it is helpful to see how Walgreens’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 4/2/2024
[2] Cumulative total returns since the end of 2016

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