Should You Avoid Walgreens Stock Ahead Of Q4 Results?

Walgreens (NASDAQ: WBA) is scheduled to report its fiscal Q4 2024 results on Tuesday, October 15 (Walgreens’ fiscal ends in August). We expect the company to post mixed results, with revenue of $34.9 billion and earnings of $0.38 per share, compared to the consensus estimates of $35.7 billion and $0.36, respectively. While the company’s top-line is expected to see slight growth, its bottom line will likely see a decline of 43% y-o-y. The company has been facing headwinds for its U.S. retail business lately, amid a weak consumer sentiment. This led to the company lowering its full-year outlook in the previous quarter. Furthermore, the rise of online pharmacy and direct to consumer platforms pose a threat to Walgreens’ business. These factors have weighed on its stock, down 65% year-to-date. Our interactive dashboard analysis of Walgreens’ FY 2024Q4 Earnings Preview has more details on how the company’s revenues and earnings will likely trend for the quarter. 

What Trends Will Drive Walgreens’ Q4 Results?

Walgreens should continue to benefit from drug price inflation and growth in its pharmacy services. Its healthcare business, which offers primary care offerings, has done well in the recent quarters, a trend expected to continue. The company’s international business, including Boots UK and Germany wholesale, will likely see slight growth. On the flip side, retail sales should see a decline amid a challenging macro environment, with high inflation weighing on consumer sentiment.

Looking at margins, the company is focused on cost-cutting and has taken initiatives to achieve $1 billion in savings this year. Still, its adjusted operating margin has declined by 100 bps so far this year. With margins expected to remain under pressure, the company’s earnings are expected to plunge 43% y-o-y to $0.36 per share, according to our estimates.

How Did Walgreens Perform In The Previous Quarter? 

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 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.

What Does This Mean For WBA Stock?

WBA stock has had a tough year, with its value down 65% so far. To achieve even the lower end of the company’s guided range, Walgreens will have to post a $0.44 EPS in Q4. If the company were to achieve this figure, it will likely be a positive for its stock. The company’s profitability, trends in retail sales, and the outlook for fiscal 2025 will be the key drivers to watch out for that should define the movement in WBA stock in the near term.

We estimate Walgreens’ Valuation to be $12 per share, based on a 4.4x forward expected adjusted earnings of $2.74, below the 9x average P/E ratio over the last four years. Walgreens stock has been a falling knife this year, and any comparison to historical valuation multiple doesn’t help. The stock will likely see a rebound only when there is a visible roadmap for an improvement in profitability or any other strategic initiative that may enhance shareholder value. We believe it will be wise to wait for Walgreens to post its results and outlook before entering the stock.

Notably, the decrease in WBA stock over the recent years has been far from consistent, with annual returns being more volatile than the S&P 500. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is much less volatile. And it 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.