Walgreens Boots Alliance: Deep Value With Nowhere to Go But Up

Key Points

• Walgreens Boots Alliance had a better-than-expected quarter but narrowed guidance on sluggish US consumer retail. 
• Non-cash impairments cut deeply into the GAAP results but the adjusted show growth. 
• Walgreens is trading at a deep value and pays a high yield that can be sustained in 2024. 

Walgreens Boots Alliance's NASDAQ: WBA efforts are paying off, although they still have work to do. The company's leaning toward efficiency and efforts to reinvigorate growth, sustain growth and improve profitability will drive shareholder value over the long term. The question today is how much lower the stock price can move, and the question is likely not far. 

The stock is trading above a critical support level that coincides with the low end of the analyst's range, suggesting a floor is in place. Because the company is growing and on track to return to GAAP profitability, the 6X P/E valuation and 4.75% yield are more than attractive at this technical level. 

Walgreens Has A Solid 2ns Quarter, Narrows Guidance

Walgreens had a solid quarter, with strength in all segments driving 6.3% top-line growth. Revenue of $37.05 million outpaced the Marketbeat.com consensus by 340 basis points, led by strength in US Healthcare. US Healthcare grew more than 33% yearly and is quickly approaching profitability. International grew by 6.6%, and US Retail Pharma by 4.6%. 

The margin news is mixed. The GAAP margin contracted considerably due to a non-cash impairment, leaving a loss nearing $6 billion. The non-cash impairment is due to a reduced valuation of VillageMD's goodwill, which had little impact on the underlying business. The adjusted margin contracted but was less than expected, leaving the net income up 3% and the adjusted earnings 3.4%, which outpaced the consensus by 4600 basis points. 

Given the company's strengths in Q2, guidance is a negative factor, but it may be cautious. The company narrowed the range for earnings by lowering the top end because of weakness in US retail sales and less sale-leaseback activity. However, the mid-point remains above the analysts' consensus, aligning with the idea there is a floor in the market for this healthcare stock. 

Walgreens Dividend Is Safe For 2024

Walgreens' cash flow and free cash flow turned negative in Q2, raising the fear of another dividend cut, but it is premature to assume that one is coming. The cash burn is due primarily to legal matters that are not expected to recur; if it had been adjusted for that, FCF would have been positive. The net result to the balance sheet is a $142 million or 16.5% reduction in cash and securities, leaving the balance solid at $715 million. 

Regarding the dividend, Walgreens cut its payment at the end of F2023 but can sustain the $1.00 payout this year, with dividend health expected to improve by the end of the year. The payout is worth about 4.75%, with the stock trading at rock-bottom and is 30% of this year's earnings guidance and 28% of the following. 

Institutions Are Buying Walgreens At Long-Term Lows

The institutional activity in Walgreens has been hot in the last few quarters, with both selling and buying gaining steam. However, the net result is bullish, with buyers outpacing sellers for four consecutive quarters. This activity coincides with the bottom in the price action; if it continues to be bullish on balance, it will help lift the market over time. 

Analysts' revisions recently reduced Walgreens' sentiment to Reduce but may have reached the bottom. The latest price target revisions are lower, but most are above the low and range near the consensus, which is 20% above the price action. A change in sentiment marked by upgrades or upward price target revisions would catalyze the market. 

Walgreens Technical Action is at a Bottom 

Walgreens Boots Alliance shares hit bottom late in 2023 and are retesting the level now. If the market confirms support at this level, WBA stock could rebound to $26 or higher. In that scenario, the critical resistance would be near $26.80. If not, WBA may fall through support in search of firmer support levels, but that is not expected.