Walgreens: Up 37% Year-To-Date, Does Walgreens Boots Alliance Still Have Room To Run?
Walgreens Boots Alliance (WBA) has quietly been one of the most exciting stocks in the entire market during 2021 thus far. The company, which according to 5-star Nobias analyst, Richard Saintvilus’ most recent article on the stock, operates “more than 9,000 retail locations across America, Puerto Rico and the U.S. Virgin Islands, Walgreens has played an important role in the country’s Covid vaccination efforts, supporting vaccinations across 43 states and jurisdictions as part of the Federal Retail Pharmacy Program.”
The drug store industry isn’t known to be a high growth space; however, WBA shares are up 39.4% year-to-date. One might think that after such a strong run, there wouldn’t be a lot of upside left in the stock. However, Saintvilus says differently, noting “Even with the recent 50% rise, Walgreens stock has only reached its pre-pandemic levels which suggests the share price might be 30% to 40% undervalued. So investors who are looking for a sustained recovery candidate in the next 12 to 18 months, which also pays a strong dividend yield of 4.5%, can do well owning Walgreens.” (We should note that WBA shares have continued their rally since Saintvilus’s piece and now they only yield 3.4%).
And, he’s not the only 5-star Nobias analyst who remains bullish on shares. Sean Williams, a well respected writer for The Motley Fool, recently wrote article titled “The Best 3 Dow Stocks to Buy for the Second Quarter (and Beyond)”, in which he called Walgreens Boots Alliance (WBA) “one of the best Dow stocks investors can buy right now.” He noted that the stock was at a 52-week high. In the stock market, we all know to buy low and sell high. However, in WBA’s case, Williams thinks this stock is a buy, 52-week high or not, because it’s headed much higher.
He noted that generally speaking, “healthcare stocks aren't adversely impacted by recessions.”
However, during the COVID-19 recession, that wasn’t the case. Usually, he writes, “we don't get to choose when we get sick or what ailment(s) we develop. Therefore, drug and device demand remain steady, even during recessions.” But, that wasn’t the case during 2020 because of the healthcare scare which resulted in lower traffic in WBA drugstores and and health clinics.
WBA has struggled in recent quarters. However, during Q2, trends seemed to turn around. Amit Singh, a 5-star Nobias analyst, recently published a Q2 update for WBA on Nasdaq.com, where he highlighted the company’s surprisingly upbeat results. Singh says, “Walgreens’ 2Q adjusted earnings of $1.40 per share declined 7.5% year-over-year but topped the Street’s estimates of $1.11 per share. On a constant currency basis, adjusted EPS declined 8.2% due to lower operating income amid the COVID-19 pandemic.”
However, he notes that these earnings figures beat analyst estimates, the company posted positive results on the top-line (with $32.8 billion in sales which represented 4.6% growth), and most importantly, WBA management provided raised profit guidance for 2021.
Singh says, “As for fiscal 2021, the company raised its adjusted profit growth guidance to the mid to high-single-digit range in constant currency terms. It had previously projected adjusted profits to increase by a low-single-digit range.” WBA stock popped roughly 3.5% on these results; however, in Singh’s piece, he noted that not everyone was impressed.
He noted that “Raymond James analyst John Ransom maintained a Hold rating on the stock. In a note to investors, the analyst said that the 2Q results were “better than feared, but raised outlook doesn't paint overly optimistic F2H.” According to Singh, “The average analyst price target of $50.09 implies downside potential of about 8.8% to current levels.”
Yet, getting back to Willams’ piece, we see a much more bullish outlook, as he expresses belief that after a year of avoiding the doctor, consumers will flock to places like Walgreens to get back on top of their non-COVID-19 healthcare concerns. Williams highlighted the recent uptick in MyWalgreens memberships, which have increased by “more than 40% since Dec. 31, 2020, to 56 million.”
This plays into WBA’s new digital strategy, focused on customer loyalty and big data. Williams highlighted the fact that “during the fiscal second quarter (ended Feb. 28), Walgreens Boots Alliance saw digitally initiated retail sales rise 78%.” He also said that the company is “on track to reduce its annual operating expenses by over $2 billion by 2022.”
The combination of reduced costs and reaccelerating demand should result in strong top and bottom-line growth for the company during 2021. Right now, the analyst consensus earnings-per-share growth rate for WBA in 8%. And, as Williams concludes, “Despite its recent run-up, shares of Walgreens can be scooped up by opportunistic investors for a shade over 10 times forward earnings per share.”
Keith Speights, a 5-star Nobias analyst who focuses on the healthcare sector, recently published an article titled, “Why Investors Really Liked Walgreens Boots Alliance’s Q2 Update” which highlighted the growth in WBA’s international segment as the primary catalyst for the positive Q2 sales results.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
He said that the company’s U.S. segment only produced 0.4% sales growth during the second quarter, as “Walgreens' store optimization programs weighed on growth.”
However, Speights notes that “Walgreens' international segment sales jumped 32.6% year over year to $5.4 billion. This growth stemmed entirely from the company's new joint venture in Germany. Without this joint venture, international sales would have fallen 9.9% on a constant-currency basis due primarily to the negative impact of COVID-19.”
He also touched upon the company’s dividend, saying, “Overall, Walgreens' Q2 update appears to be reassuring for shareholders who love the company's dividend. With its prospects looking brighter and a big influx of cash on the way, Walgreens seems to be in good shape to keep its track record of 45 years of consecutive dividend increases going.”
The income oriented aspect of WBA makes it an even more interesting investment opportunity. Williams already noted that this is an intriguing value play and now with Saintvilus and Speights highlighting a well-above average dividend yield (the S&P 500 currently yields just 1.36% and the U.S. 10-year treasury note yields 1.653%) there’s no wonder that shares of this company are up nearly 40% year-to-date.
Walgreens is not considered to be a growth company and still faces eCommerce threats from the likes of Amazon.com (AMZN), which is attempting to take market share with its digital pharmacy segment, but then again, investors thinking about WBA with a low double digit multiple and a 3.4% dividend yield likely aren’t looking for speculative, growth investments.
The blue chip nature of this dividend aristocrat is likely going to be enough for them and with 13 buy ratings against just 1 sell rating amongst the 4 and 5 star analysts that Nobias tracks, it appears that the analyst community remains bullish as well.
Disclosure: Nicholas Ward has a long position in Amazon (AMZN). Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.