Walgreens Boots Alliance: Value or Value Trap?

Key Points

• Walgreens Boots Alliance rises on improved spending and cash flow. 
• Results are mixed, and guidance is tepid, but efforts are bearing fruit, and further improvement is expected. 
• The dividend is 8%, with shares at a 10-year low but comes with above-average risk. 

Walgreens Boots Alliance NASDAQ: WBA shares are down significantly over the past two years and may fall further. The company's turnaround efforts are slowly taking hold, and the impact of COVID-19 sales continues to weigh on results. However, the Q3 results show improvement in sales across all segments, and one-off costs related to restructuring and impairment charges will soon fall out of the picture. The takeaway is that Walgreens Boots Alliance shares are trading at the lowest levels in a decade, are valued at only 5.65X per share, and pay more than 8% with a potential for improvement in the coming fiscal year. 

The company announced the appointment of Tim Wentworth as CEO. Mr. Wentworth hails from Cigna and brings a wealth of healthcare-related experience. More importantly, his experience at Cigna makes him a percent fit to help drive growth and profitability in Walgreens' US Healthcare segment. That segment, notably, is in a hyper-growth phase and is expected to break even quarterly sometime in F2024. 

Walgreens Boots Alliance Grows In All Segments 

Walgreens Boots Alliance issued a mixed report, with revenue up and outperforming and earnings down and weak. The company reported $35.42 billion in net revenue for a gain of 9.2% to beat the Marketbeat.com consensus estimate by 160 basis points. The company's growth is centered in the core US Retail Pharmacy segment, which grew by 3.7% and was bolstered by 12.5% growth in International markets and 217% growth in the US Healthcare segment. 

The margin news is mixed, but one-offs and impairments are the biggest detractors. GAAP, the loss more than halved due to top-line strength, while adjusted EPS fell by 17%. The takeaway is that cash flow is sufficient to sustain operations while turnaround efforts continue. The company's interim CEO says an additional $600 million in cost-saving efforts should take hold in Q2 and help drive margin improvement. 

There is a risk for the dividend. The dividend payment in Q4 topped $1.6 billion, resulting in a cash drawdown. That aside, adjusted results are more than sufficient to cover the payment assuming for the foreseeable future. The risk is that results will not improve substantially over the next 2-3 quarters, leading the board to either cease annual distribution increases, cut the payment, or suspend it until cash flow does improve. 

Sell-Side Support For Walgreens Holds Firm 

The sell-side support for Walgreens is firm, with analysts consensus a Hold that is up from last year's Reduce, and the institutions are buying. Analysts see the stock moving up about 40% on average, but the consensus is falling and may weigh on the price action. Activity in early October preceding the release included several reduced price targets and a new low target of $21. The $21 target implies this stock is overvalued but an outlier; the next lowest target is $25, about 4% above the recent lows. MarketBeat isn't tracking any revisions yet, but they are surely coming and may be positive, given the expected improvements. 

The price action in WBA advanced about 5% following the release. The move may not lead to a sustained rally, but a bottom is in place. The following weeks will be telling and may result in higher share prices. This market could continue higher if the analysts begin raising their targets or at least begin issuing positive commentary. 

The first hurdle for the price action is near $28.50, but resistance may kick in below that level. Regardless, investors should expect this market to retest for support at or near the recent lows before it sustains upward movement. If the company continues to execute the turnaround, shares should sustain upward momentum for several quarters.