Walgreens (NASDAQ: WBA) - A Diamond in the Rough?

While blue chips, tech stocks , and seemingly anything with a pulse rallied hard over the past two months, shares of pharmaceutical behemoth Walgreens Boots Alliance (NASDAQ: WBA) have languished near their 52 week lows. This is unlikely to be surprising to many, considering they were already under significant pressure coming into the coronavirus pandemic, down 40% from their December 2018 highs through January 2020.

Still, the ferocity with which the coronavirus shut down economies and turned off revenue streams of brick and mortar reliant retailers was unparalleled and sent Walgreens’ shares down another 30% through the middle of May.

This, at a time when stocks across the board were bouncing hard and many setting fresh all-time highs, must have been particularly painful for investors. However, it looks like May might have been the low, for now at least, and shares have managed to tack on 20% since then.

Friday’s close, up 5% from Thursday’s, was one of their biggest daily jumps in a while and helped to propel the Dow Jones Industrial Average benchmark index into positive territory. Some on Wall Street might be starting to sit up, take notice and ask themselves if Walgreens is about to play some serious catch-up.

Moving in the Right Direction

The last glimpse investors had into the internal engine was when the company released their fiscal Q2 earnings in early April. In hindsight, this was coming right after the apex of the first COVID-19 wave, when damage and fear was at its maximum. There was no sign of stores being reopened, cases were still rapidly rising on a daily basis but even so, Walgreens managed to beat analyst expectations with their EPS and revenue prints. The latter came in with growth of 3.6% year on year which would have been particularly relieving for investors, many of whom must have been praying to have just some kind of growth at all.

That being said, prior to the pandemic the company had been confident in its 2020 guidance of EPS being about flat. April’s report saw Q2 EPS drop about 7% year on year so understandably management refrained from making any further updates on 2020’s guidance until more certainty has returned.

In terms of positives for the bulls to focus on, with regards to the Transformational Cost Management Program, management’s flagship strategy to get the company back to winning ways, the report confirmed that they’re on track to deliver close to $2 billion in annual cost savings by 2022.

Healthy Dividend

Management also confirmed their dividend, which at current levels equates to a hefty 4.15% yield. They’re making all the right kinds of signals to investors on the sidelines that even with shares still on a multi-year downtrend, they’re worth a shot.

Let’s not forget that with almost a $40 billion market cap, Walgreens is one of the biggest names in the pharmaceutical distribution, wholesale and retail industry.  They operate more than 18,000 stores in eleven countries, have more than 400 distribution centers, and deliver to almost 250,000 pharmacies, doctors and health centers across the world. There are certain economic and competitive advantages that come with this kind of scale and the pharmaceutical industry isn’t going anywhere.

On top of their multi-year cost-saving program, management is focused on increasing the digitalization of its operations and restructuring its retail business while also continuing to convert neighborhood stores into neighborhood health centers. All good things that can only serve to drive continued growth and a return to consistent profitability.

Even so, many on Wall Street might be more tempted to back instead of a stock that’s powering to fresh all time highs on a daily basis, coronavirus be damned, but others might still be attracted to this diamond in the rough. At these levels, it feels like the opportunity outweighs the risks, with May’s low, only 16% below Friday’s close, providing a comfortable stop-loss target.