December 11th, 2017

Walgreens: Should You Buy the Dip?

Walgreens Boots Alliance, Inc. (WBA) is one of the leading drugstore chains in the United States that operates more than 9000 stores across the nation and also provides online services. However, the stock has recently witnessed a steep decline after Amazon (AMZN) entered the pharma space. Find out if you should buy the dip in WBA.

Walgreens Boots Alliance, Inc. (WBA) operates as a pharmacy-based health retail company. The company operates a network of drugstores in the United States. It provides consumer goods and services, pharmacy, and health and wellness services through drugstores, as well as through mail, and by telephone and online. It operates through three segments – Retail Pharmacy USA, Retail Pharmacy International, and Pharmaceutical Wholesale.

WBA has recently announced a complete reinvention of its customer loyalty program. The launch of myWalgreens provides new and expanded benefits to the chain’s more than 100 million members shopping at its 9,000+ stores. The company has redesigned its mobile app for health and wellness items that can now be picked up in-store, curbside, or through local pharmacy drive-throughs in as few as 30 minutes.

WBA’s fiscal fourth-quarter results did not fail to impress the street. Revenues saw a 2.3% year-over-year increase led by growth in prescriptions filled. The company reported adjusted earnings of $1.02 per share, a 28% decline compared to the year-ago quarter, attributable to continued pressure on its margins from international business, as well as the adverse impact of COVID-19.

However, the bad news for the drugstore stock is that (AMZN) has entered the pharmacy business. The e-commerce giant has launched Amazon Pharmacy, a new online store that will allow customers to order prescription drugs directly to their homes. The news sent shares of WBA tumbling 9.6% on the announcement day last week with fears of the drugstore sector becoming the latest to land in AMZN’s crosshairs.

Hence, despite posting a strong quarterly performance, the uncertainty related to the stock’s momentum based on several factors has made our proprietary rating system rate WBA as “Neutral.”

Here is how our proprietary POWR Ratings system evaluates WBA:

Trade Grade: D

WBA is currently trading higher than its 50-day moving average of $37.28 but below its 200-day moving average of $41.30, indicating that the stock is neither in an uptrend nor in a downtrend. Moreover, the stock has gained merely 1% over the past three months.

AMZN’s pharmacy wiped off $10 billion from WBA’s market value on the announcement day. The tech-giant offers its Prime members free two-day delivery on prescriptions and savings of up to 80% on generics and 40% on brand-name medications, even without insurance. Amazon Pharmacy discounts will also work at brick-and-mortar pharmacies, with the company partnering with more than 50,000 pharmacies nationwide.

Buy & Hold Grade: C

In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade takes into account, WBA is not positioned well. The stock is currently trading 35.5% below its 52-week high of $60.54.

Looking at the past three years, the stock has lost nearly 40% as WBA’s EPS have declined significantly at an average rate of 48.4% over the same period. However, WBA has been able to consistently grow its revenues at a CAGR of 5.7% in the same period, primarily led by growth in its US retail business, which more than offset the deterioration in the company’s international store sales.

Additionally, WBA is a dividend aristocrat that has increased its dividend consistently for 43 years. Over the past ten years, the company has grown its payout at a CAGR of 13.6%. Furthermore, the stock has a four-year average yield of 2.89%.

WBA has rapidly expanded by developing urgent care centers in the past years. It also formed a retail partnership with Kroger (KR) last year. However, the company is still transitioning the purchase of nearly 2,000 Rite Aid Corporation (RAD) stores it acquired at $17 billion in 2018. Given RAD’s struggles, WBA might not be able to fix some of those stores and that could be a drag on its entire business.

Peer Grade: C

WBA is currently rated #2 out of 4 stocks in the Medical – Drug Stores industry. Other popular stocks in the group are CVS Health Corporation (CVS), RAD, and Trxade Group Inc. (MEDS). WBA is down 30.8% year-to-date. The sector has been heavily bleeding as CVS, RAD and MEDS have also lost 6.1%, 18.8%, and 25%, respectively, over this period.

Industry Rank: C

WBA is part of the Medical – Drug Stores industry, which is ranked #51 out of the 123 industries. The companies in this industry sell prescription drugs, over-the-counter medications, health and beauty products, and general merchandise from physical retail locations. The pandemic has revealed the limitations of the global healthcare system and the industry is still experiencing restrained growth as lockdowns disrupted the global supply chain and logistics. However, the market is expected to grow due to the increased requirement of PPE kits, masks, and ventilators amid the rising infections. Moreover, the industry will play a pivotal role in the mass distribution of a successful COVID-19 vaccine.

Overall POWR Rating: C (Neutral)

Despite an impressive quarterly performance, strong pandemic-related demand, and strategic expansion, WBA is rated a “Neutral” due to stiff competition from online retailers and struggling international segments, as determined by the four components of our overall POWR Rating.

Bottom Line

Healthcare demand is expected to grow due to the ongoing pandemic and the industry can still thrive, even with the launch of Amazon Pharmacy. National drugstore chains had put local small-town pharmacies out of business and the national pharmacies are now threatened by the online companies and retailers. However, drugstore chains like WBA will serve an unprecedented role in the widespread supply of an effective coronavirus vaccine in the coming year.

AMZN, of course, has a reputation for disrupting industries. AMZN almost completely slaughtered the bookstore industry with its online offerings. However, AMZN was unable to sweep off the supermarket sector when it entered the grocery business in 2017 with the purchase of Whole Foods Market for $13.7 billion.

WBA has recently promised its customers to access to a successful COVID-19 vaccine at more than 9,000 of its stores when it’s available. “When you want to get your COVID vaccination, are you going to call Amazon or are you going to call Walgreens?” WBA management asked, questioning whether parents whose children are sick would be happy to wait a few days to receive a prescription drug.

Analyst sentiment, which gives a good sense of a stock’s future price movement, is moderate for WBA. Out of 22 analysts that rated BA, 20 advised holding the stock. AMZN’s entry should not be a worrying factor for WBA. So, the recent dip appears unwarranted. AMZN’s service is currently mail-only, which accounts for about 10% of prescriptions filled in the United States. Still, WBA’s share price could remain under pressure as AMZN advances its e-commerce foothold into the massive healthcare industry, despite people being loyal to physical drugstores.

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WBA shares were trading at $39.15 per share on Friday morning, up $0.08 (+0.20%). Year-to-date, WBA has declined -30.67%, versus a 14.52% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.


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