How Does The Current Fall In Walgreens Stock Compare With The 2008 Crash?

Walgreens stock (NYSE: WBA) currently trades at $17 per share, about 70% below the level seen in April 2021, and it appears undervalued. WBA stock was trading at around $38 in early June 2022, just before the Fed started increasing rates, and is now 56% below that level, compared to 41% gains for the S&P 500 over this period. Our detailed analysis of Walgreens’ upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

This underperformance of Walgreens stock can be attributed to slowing sales growth, partly due to a weakening consumer spending environment. Its profitability has also been adversely impacted in the recent past due to opioid-related settlements and impairment charges associated with its VillageMD acquisition. However, its stock did see higher levels after reports of it contacting potential buyers for the Boots business emerged.

Looking at a slightly longer term, WBA stock has suffered a sharp decline of 60% from levels of $40 in early January 2021 to around $15 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? Returning to the pre-inflation shock level of over $57 means that WBA stock will have to gain more than 240% from here, and we don’t think this will materialize anytime soon. That said, WBA stock looks undervalued at its current price of $16. We estimate Walgreens’ valuation to be around $24 per share, 45% above its current market price. Our estimate is based on a 7x forward expected adjusted earnings of $3.28. Walgreens expects its adjusted earnings to be in the range of $3.20 and $3.35 in 2024. The 7x P/E multiple is slightly below the 9x average over the last four years. A slight decline in valuation multiple seems justified, given the near-term headwinds from weakening consumer demand.

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
• April 2021: Inflation rates cross 4% and increase rapidly.
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P500 recoup some of its losses.
• Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession, and it is prepared for rate cuts in 2024.

In contrast, here’s how WBA stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Walgreens and S&P 500 Performance During 2007-08 Crisis

WBA stock declined from nearly $27 in September 2007 (pre-crisis peak) to $17 in March 2009 (as the markets bottomed out), implying it lost nearly 40% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $26 in early 2010, rising 56% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

Walgreens’ Fundamentals Over Recent Years

Walgreens’ revenue increased from $139.5 billion in fiscal 2020 (fiscal ends in August) to $144.6 billion in the last twelve months, partly due to its acquisition of VillageMD. However, the sales growth has slowed in recent quarters due to a weakening consumer spending environment. The company’s bottom line stood at $(7.00) on a per-share and reported basis for the last twelve months period, compared to the $0.52 figure in 2020.

Does Walgreens Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Walgreens’ total debt, including lease obligations, decreased from $40 billion in 2020 to $34 billion now, while its cash, including investments, has halved to around $4 billion now, compared to around $8 billion in 2020. The company also garnered $2 billion in cash flows from operations in fiscal 2023. Walgreens has high debt levels, but with its cash cushion, it appears to be in a position to meet its near-term obligations.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe Walgreens stock has the potential for gains once fears of a potential recession are allayed. While unfavorable macroeconomic factors, weak consumer demand, and high debt levels are potential risk factors for Walgreens, much of these appear to be priced in, with a significant decline in its stock price. We think investors will be better off buying WBA in this dip for solid long-term gains.

While WBA stock appears undervalued, 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 5/22/2024
[2] Cumulative total returns since the end of 2016