Walgreens Boots Alliance (NYSE:WBA) is expected to report solid earnings on Thursday, January 7. The consensus of analysts has the company delivering earnings of $1.02 per share on sales of $34.89 billion. The whisper number is suggesting even stronger profits of $1.11 per share.
On a year-over-year basis, that would represent flat revenue, but about a 20% decline in earnings. That isn’t completely surprising. The company is still absorbing costs due to the Covid-19 pandemic. However, Walgreens has been seeing a pickup in pharmacy sales in the last two quarters. And Forbes is saying that strong pharmacy sales means that WBA stock may be undervalued by about 20%.
Will Investors Be Rewarded With Growth in 2021?
At first glance, it would seem that a global pandemic would be a catalyst for a pharmacy. And for the most part, Walgreens Boots Alliance continues to weather the pandemic quite well. But the company operates in a competitive sector in which it can be hard to find meaningful differentiation.
And that was on full display in 2020. Despite a rally towards the end of the year, WBA stock came in with a loss of nearly 33%, making it one of the worst value stocks of the year. That was despite the company making it 44 consecutive years of increasing its dividend.
However in a year when many stocks were surging higher on, well, nothing … a dividend was not enough. But if the outlook by Forbes is accurate, that could be changing.
How big of a problem does Amazon represent?
One of the drags on Walgreens stock in 2020 was that Amazon (NASDAQ:AMZN) stepped up its prescription drug business. The obvious, but perhaps too simplistic, inference is that Amazon’s dominance will be inevitable. Consumers are now conditioned to order everything from takeout to toilet paper online. Prescription drugs aren’t the leap they once were.
However there are two dynamics going on in this space. The first is the maturation of the digital economy. Amazon certainly is a leader in that space. However that doesn’t mean that Walgreens is going lightly. Companies like Walgreens and CVS (NYSE:CVS) continue to make strides in ensuring their customers can get their prescriptions when, and how, they desire.
But the key may actually be in the ability of the brick-and-mortar stores to offer a personal touch. Pharmacy chains have long used nurse practitioners in their stores. Walgreens is taking the primary care model to the next level. The company has invested $1 billion in its partnership with medical services provider, VillageMD, to provide up to 700 primary care clinics in over 30 markets.
The five-year plan is a continuation of Walgreens attempt to build a primary care infrastructure. And the pandemic certainly has not made this any less of a risk for Walgreens, particularly as the telehealth model has taken root. The presumption is that Amazon will eventually get into the telehealth space. But they’re not there yet.
As pandemic concerns ease among our most vulnerable populations, the presence of a primary care physician in the pharmacy may provide a compelling reason for individuals to stick with Walgreens. Particularly if they can have their prescriptions delivered.
Ultimately the Front of the House Matters
The larger problem for Walgreens is that as a brick-and-mortar retailer, they need to generate revenue from the front of their stores. And so there has to be some concern that they could win the battle against digital delivery of prescriptions, but still lose the overall war on retail. Only time will tell.
And time is the issue here. Walgreens may not be a long-term buy and hold stock, even with the dividend. However, the company looks like an ideal short-term stock for investors who are convinced that the stock is ready to breakout.
For those that look for technical indicators the jury is mixed. On the one hand, the stock’s 50-day moving average is ready to form a Golden Cross of its 200-day moving average. This is typically a bullish signal for the stock. On the other hand, the relative strength indicator is nudging its way towards 70 which indicates bearish momentum.
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