Why Did Walgreens Stock Jump 18%?

Walgreens stock (NASDAQ:WBA) surged 18% on December 10 after reports emerged that it was being sold to a private equity investor. Walgreens is likely discussing a deal with New York-based Sycamore Partners that could close early next year. Sycamore specializes in consumer, distribution, and retail-related investments. ^[1]

Walgreens has struggled lately due to declining prescription reimbursements and rising competition from Amazon and other discount stores. It has closed hundreds of stores in recent years, and it plans to close 1,200 stores by 2027 – a move necessitated by the fact that a quarter of the company’s stores aren’t profitable. Separately, if you want upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.

Furthermore, there are direct-to-consumer telehealth and e-commerce platforms, which may offer drugs at lower prices. Earlier this year, Eli Lilly announced that it would cut the prices for certain doses of its popular obesity drug – Zepbound – if ordered directly from Eli Lilly’s e-commerce platform. The new pricing for these doses will be 50% cheaper than the other GLP-1 drugs in the market, although the reduced pricing won’t apply to the doses covered by insurance. ^[2] These factors add to the woes of companies like Walgreens and CVS.

Now, Walgreens not only relies on pharmacy but also retail sales, and the factors above imply a lower footfall, which will impact its retail sales as well. Walgreens has been focused on expanding its online and primary care offerings to aid revenue growth. The VillageMD acquisition in 2021 was a step in that direction. However, VillageMD had to shut operations at hundreds of clinics to cut costs and boost profitability. Walgreens also ended up recording a $5.8 billion impairment charge related to its VillageMD investment in fiscal 2024.

Walgreens tried to sell its international chain – Boots – but decided not to proceed with the sale amid valuation issues. Now, selling to a private equity firm bodes well for investors as the valuation offered will likely be at a premium to the market value. WBA stock has taken a beating in the last few years, with its market capitalization falling from roughly $50 billion in early 2022 to around $7.5 billion earlier this month.

Even after its recent 18% rise, WBA stock is down 57% this year. 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. Returns for the stock were 36% in 2021, -25% in 2022, and -25% in 2023. 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.

We estimate Walgreens’ Valuation to be $14 per share, based on 8x forward expected adjusted earnings of $1.71 in fiscal 2025, below the stock’s average P/E ratio of 10x over the last three years. A decline in valuation multiple seems justified, given the bleak profitability outlook for Walgreens and the increased competition from direct e-commerce platforms.

While WBA stock has been on a decline, 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 12/11/2024
[2] Cumulative total returns since the end of 2016

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1. Walgreens Is in Talks to Sell Itself to Private-Equity Firm Sycamore Partners, Cara Lombardo, Lauren Thomas, and Anna Wilde Mathews, The Wall Street Journal, Dec 10, 2024 [↩]
2. Eli Lilly’s Press Release, August 27, 2024 [↩]