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After a 27% fall year-to-date, at the current levels, we believe Walgreens stock (NYSE: WBA) can see higher levels. WBA stock fell from $53 in early January to $39 now. The broader markets have performed better, with the S&P500 index falling 20% YTD. Looking at the longer term, WBA stock is down 35% from levels seen in late 2019. This marks an underperformance compared to some of its peers and the broader markets, with CVS Health stock rising 26%, Target stock up 10%, and the S&P 500 index rising 18% over the same period.

This 35% decline for WBA stock since late 2019 was driven by: 1. the company’s P/E ratio, which fell 26% to 7.3x trailing adjusted earnings, from 9.9x in 2019, and 2. Walgreens
WBA
’ adjusted earnings declining 10% to $5.40 over the last twelve months, compared to $5.99 in 2019. The decline in earnings can be attributed to a lower net income margin, which more than offset a rise in revenues and a fall in shares outstanding.

Walgreens’ revenue grew 12% to $134.5 billion over the last twelve months, vs. $120.1 billion in 2019. The revenue growth over the recent years was driven by increased demand for Covid-19 testing and vaccine administration. Now that the economies have opened up, the company will see a lower contribution from Covid-19-related offerings. However, it also means a rise in footfall at its stores, aiding retail sales.

The company’s international business has been a drag on its performance, with total sales (pharmacy and retail) declining 7% between 2019 and 2021. The rise of online and discount pharmacies has resulted in stiff competition, weighing on Walgreens’ international business. The company wanted to divest its Boots U.K. business, but it has recently announced that it no longer intends to sell it. This decision was driven by a weakness in the financial markets and the company not receiving bids in line with its expectations.

Walgreens’ adjusted net margin contracted over 100 bps to 3.5% over the last twelve months, compared to 4.6% in 2019, due to higher costs. It has spent a little over $6.0 billion on share repurchases since 2019, resulting in a 6% decline in total shares outstanding to 864 million currently.

Now, with the worst of the pandemic likely behind us, the economies have seen a recovery, and the fact that 67% of the U.S. population is fully vaccinated, the demand for Covid-19 testing as well as its vaccine administration is expected to decline, weighing on the overall revenue growth for Walgreens over the next few quarters. However, the company’s other businesses – including pharmacy services and retail, are expected to grow steadily.

That said, Walgreens stock faces headwinds from the current weakness in broader markets. The S&P500 has now entered the bear market territory with rising concerns of slowing economic growth given the high inflation, Fed action, and supply chain disruptions. Despite the near-term headwinds, we believe that WBA stock has room for growth. We estimate Walgreens’ valuation to be $47 per share, reflecting a 22% upside from its current market price of $39, implying that investors may be better off using the recent dip to enter WBA stock for gains in the long run. Our valuation is based on a forward P/E ratio of 9.4x based on our earnings forecast of $5.04 on a per share and adjusted basis for full-fiscal 2022. This compares with the last three-year average of 9.9x.

While WBA stock is likely to see higher levels, it is helpful to see how Walgreens’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Target vs. Emergent Biosolutions.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

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