Seizing Opportunity in the Dip: Should You Invest in Walgreens Boots Alliance?

TipsForTraders | May 9, 2024

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Amid financial turbulence, discerning investors often scout for undervalued assets with potential for significant appreciation. Walgreens Boots Alliance (WBA), a staple in the pharmaceutical retail sector, presents such an opportunity as it nears the end of a challenging fiscal year 2024, concluding on August 31. With its shares plummeting to a 28-year low of $17.24, the company’s valuation disconnects sharply from its inherent worth, attracting the eyes of contrarian investors.

Walgreens Boots Alliance has witnessed a dramatic decline in its stock price, from a 52-week high of $32.87 to a historical low, amidst a backdrop of a disappointing fiscal performance with estimated earnings per share dwindling from $3.98 in FY 2023 to between $3.20 and $3.23 in FY 2024. Despite these figures, the company’s long-term financials tell a different story. Over the past decade, Walgreens has more than doubled its per-share sales while incrementally boosting cash flow and EPS by 12% and 10.3%, respectively. Additionally, the reduction of shares outstanding by about 9.25% enhances the value per remaining share.

The current market price of WBA suggests a nearly 75% discount compared to its value a decade ago, a discrepancy that hints at significant potential gains for current buyers. Moreover, the stock’s dividend yield of 5.79%—with a quarterly payout of 25 cents—offers an appealing income stream, especially compared to the static yields of the best bank CDs.

In terms of valuation, the average price-to-earnings (P/E) ratio for Walgreens from 2014 through 2023 was approximately 13.6 times, with a yield of about 3.02%. More recently, this ratio has tapered to around 10 times. Despite a contraction in net profit margins to about 1.9% in FY 2024—the lowest in the company’s history—management efforts aimed at operational improvements suggest potential margin normalization.

Projected earnings for FY 2025, based on an improved net profit margin of 2.5% and sales per share of $171.80, could elevate EPS to around $4.30. If realized, even a modest P/E ratio of nine could propel the stock price to $38.70, representing a 124.2% gain, inclusive of dividends. My valuation pegs WBA at a conservative $30.40 based on this year’s EPS, which could yield an 81.9% return over the next 12 months.

Contrasting views on Walgreens’ fair value include Yahoo Finance’s estimate of $29.07, suggesting a 74% total return by next spring, while FAST Graphs and GuruFocus present a higher perceived value due to the stock’s undervalued status. Morningstar remains particularly bullish, assigning a 5-star rating to WBA and a fair value estimate of $33, citing the stock’s substantial discount as an attractive buy.

The strategy of investing in undervalued stocks like Walgreens Boots Alliance hinges on recognizing the discrepancy between price and value. The substantial markdown on WBA shares, coupled with a promising outlook for recovery, presents a compelling case for value investors. This approach requires a unique temperament—to invest in sectors others overlook, anticipating a reversion to mean valuations. Such opportunities often arise when the market consensus underestimates a company’s resilience and long-term prospects, making now an intriguing moment for investors willing to bet against the prevailing pessimism.

In conclusion, the compelling valuation of Walgreens Boots Alliance (WBA) at its current low price presents a noteworthy opportunity for value investors. The stock’s significant discount relative to its historical performance and intrinsic value, combined with a solid dividend yield, sets the stage for potentially robust returns. As the company navigates through its fiscal challenges and implements strategic measures to bolster profitability, the market’s re-evaluation could yield substantial gains. Investors equipped with the foresight to recognize the potential in such underpriced assets, and the patience to await their revaluation, are positioned to capitalize on the disconnect between current perceptions and future realities. Thus, despite the prevailing market sentiment, Walgreens offers a quintessential example of how contrarian investment strategies can lead to considerable rewards in the financial landscape.