Walgreens (WBA) has faced significant challenges, with a year-to-date stock decline of 57%, exacerbated by store closures, eroded pharmacy margins, and reduced demand. Moreover, the company may exit the S&P 500 (SPX) by the end of the year after being removed from the Dow Jones Industrial Average earlier this year. Despite the current situation, Walgreens is not without potential hope.
The appointment of a new CEO in 2023 marked the beginning of a turnaround strategy, including introducing five new executives, a strategic review of operations, and initiating a store footprint optimization program to close underperforming stores. Also, with the stock trading at a discount to industry peers, there seems to be an opportunity for a rebound if management can show meaningful progress in its turnaround efforts. It could be an intriguing option for risk-seeking investors looking for a contrarian value play.
Walgreens’ Sprawling Operations
Walgreens is a global healthcare, pharmacy, and retail enterprise that operates in various markets, including the United States, the United Kingdom, Germany, and other international locations. The company is segmented into three major areas: U.S. Retail Pharmacy, International, and U.S. Healthcare.
The U.S. Retail Pharmacy division manages retail drugstores, health and wellness, and home delivery pharmacy services. The International division sells prescription drugs, health and wellness products, beauty products, personal care products, and other consumer products outside the United States. Lastly, the U.S. Healthcare division comprises VillageMD, which provides value-based care in traditional clinic settings such as patients’ homes and online platforms.
Walgreens’ Recent Financial Results & Outlook
Walgreens recently reported third-quarter results for 2024. Revenue of $36.35 billion beat analysts’ estimates of $35.94 billion and marked a 2.6% increase from the previous year. Operating income of $111 million significantly improved over the previous year’s operating loss of $477 million. Net earnings were $344 million, an increase of $225 million from the prior year, while earnings per share (EPS) of $0.63 fell short of analysts’ estimates of $0.71.
In a significant move, Walgreens completed the sale of its unencumbered Cencora Inc. (COR) shares, amounting to proceeds of $818 million. This has led to a decrease in Walgreens’ ownership of Cencora’s common stock from approximately 12 percent to roughly 10 percent. The proceeds from this sale will primarily be used for debt repayment and general corporate purposes as part of Walgreens’ strategy to build more capital-efficient health services centered around its retail pharmacy footprint.
Furthermore, the company has announced the pricing of a public offering of senior unsecured notes, valued at $750 million, with an 8.125% interest rate due by 2029. The proceeds from this offering, alongside cash on hand, will be used to repay and possibly retire the firm’s outstanding 3.800% notes due by 2024, with any remaining amounts dedicated to general corporate purposes.
Following third-quarter results, Walgreens’ management has offered guidance for 2024, revising EPS downward from $2.80 to $2.95, reflecting challenging pharmacy industry trends and a worse-than-expected U.S. consumer environment.
What Is the Price Target for WBA Stock?
The stock has been on a multi-year downward trend, shedding 73% over the past three years. It trades at the low end of its 52-week price range of $10.69 – $29.30 and shows ongoing negative price momentum, trading below its 20-day (12.87) and 50-day (14.87) moving averages. With a P/B ratio of 0.7x, the stock trades at a discount to the Pharmaceutical Retailers industry, which has a P/B average of 1.8x.
Analysts following the company have taken a cautious stance on the stock. For example, Barclays analyst Stephanie Davis recently lowered the price target from $11 to $7 while maintaining an Underweight rating on the shares, noting expectations for lower U.S. retail pharmacy revenues and margins for FY25 amid continued macro challenges.
Overall, Walgreens is rated a Hold based on the recommendations and price targets issued by 12 analysts. The average price target for WBA stock is $13.67, representing a potential 25.18% upside from current levels.
Walgreens in Summary
Walgreens continues to grapple with industry challenges and a less favorable U.S. consumer environment. It seeks to turn its fortunes around by optimizing store footprint operations and reviewing overall strategic operations. This may be a prospect for contrarian value investors seeking a high-risk turnaround situation.
