Down Over 50% This Year Should You Pick Walgreens Stock At $12?

Walgreens (NASDAQ:WBA) recently reported its Q3’24 results (fiscal ends in August), with revenue exceeding but earnings falling short of our expectations. The company reported revenue of $36.4 billion and adjusted earnings of $0.63 per share, compared to our estimates of $36 billion, and $0.75, respectively. Not only did Walgreens post downbeat earnings, it lowered its full-year outlook due to a challenging consumer environment. This did not bode well with the investors, and WBA stock plunged over 20% in the early hours of trading on Thursday, June 27. In this note, we discuss Walgreens’ stock performance, key takeaways from its recent results, and valuation.

WBA stock has suffered a sharp decline of 70% from levels of $40 in early January 2021 to around $12 now, vs. an increase of about 45% for the S&P 500 over this 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 ample room for growth. We estimate Walgreens’ Valuation to be $17 per share, based on a 6x forward expected adjusted earnings of $2.89, below the 9x average over the last four years. A decline in valuation multiple seems justified, given the bleak profitability outlook for Walgreens. However, at current levels of $12, it is trading at just 4x forward earnings, which seems to be very low, in our view.

Walgreens’ revenues were up 2.6% to $36.4 billion in Q3’24, primarily benefiting from its U.S. Healthcare business, rising 8% to $2.1 billion, driven by the VillageMD (including Summit Health) acquisition. U.S. Retail Pharmacy revenue was up 2% to $28.5 billion, and International revenue was up 3% to $5.7 billion. This rise in revenue can primarily be attributed to increased prescription volume and drug price inflation.

The company’s operating margin stood at 1.4% in Q3’24, compared to 2.4% in the prior-year quarter. The earnings of $0.63 on a per share and adjusted basis were down 37% from $1.00 in the prior-year quarter.

Walgreens posted a downbeat Q3 results and it lowered its full-year outlook. It now expects its adjusted earnings per share to be between $2.80 and $2.95, compared to its prior guidance of $3.20 and $3.35. The company’s management stated that a weakening consumer spending environment is expected to weigh on its bottom line even in the second half of the fiscal year. However, we believe that much of the negatives are priced in for Walgreens, with its stock trading around $12, just 4x forward expected earnings.

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 6/27/2024
[2] Cumulative total returns since the end of 2016

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