Walgreens’ Tumultuous Ride
Walgreens (NYSE:WBA) recently turned heads with its Q2’24 results, showing revenue and earnings that outpaced street forecasts. Despite reporting a revenue of $37.1 billion and adjusted earnings per share of $1.20, above estimates of $35.9 billion and $0.82, respectively, the company dimmed its outlook citing rough retail waters, and took a hit with a hefty $5.8 billion impairment related to its VillageMD investment. These revelations ticked off some Wall Street pundits, leading them to slash their price marks for WBA, culminating in a harsh 10% plummet on April 1.
The Stock’s Rollercoaster Returns
Zooming out slightly, WBA’s stock has undergone a wild rollercoaster ride, dipping a staggering 50% from around $40 in early 2021 to the current $20 figure. In comparison, the S&P 500 saw a 40% gain during this tumultuous three-year period. The phasing of WBA stock’s performance has been anything but smooth – with a 31% rise in 2021, followed by -28% in 2022, and a further -30% in 2023. Conversely, the S&P 500 embraced a 27% surge in 2021, a -19% slip in 2022, and a 24% upswing in 2023, highlighting that WBA indeed lagged behind the broader index in the last couple of years.
The Quest for Consistent Outperformance
Historical data paints a grim picture for stocks trying to outdo the S&P 500 consistently, with giants like WMT, PG, and COST, or even tech titans like GOOG, TSLA, and MSFT struggling to keep pace. In stark contrast, the Trefis High-Quality Portfolio, holding a mix of 30 stocks, managed to outshine the S&P 500 year after year. What gives? The HQ Portfolio presented superior returns with less hair-raising risks compared to the benchmark, evident in its performance metrics, lighting a pathway for others to follow.
Valuation and Future Projections
Amidst the current volatile macroeconomic setting, characterized by soaring oil prices and elevated interest rates, could WBA be heading for yet another rut, painting a gloomy picture akin to 2022 and 2023, where it lagged the S&P 500? Or will it stage a remarkable recovery? From a valuation standpoint, there seems to be room for growth in WBA stock, particularly after its recent stumble. The estimated valuation of Walgreens stands at $24 per share, predicting a 7x multiple on forward expected adjusted earnings of $3.28, just beneath the four-year average of 9x.
A Deep Dive into Walgreens’ Performance
Walgreens clocked a 6% upswing in revenues to $37.1 billion in Q2’24, majorly propelled by its U.S. Healthcare segment, soaring 33% to $2.2 billion, steered by the VillageMD acquisition. U.S. Retail Pharmacy revenue also notched a 5% uptick to $28.9 billion, while International revenue saw a 7% lift to $6.0 billion. This revenue acceleration can be pinned on the surge in prescription volume and drug price inflation.
The company’s operating margin took a nosedive to -35.5% in Q2’24, a stark contrast to the prior-year’s 0.6%. This drastic fall was mainly triggered by the goodwill impairment tied to VillageMD. Despite this setback, the EPS of $1.20 on an adjusted basis signaled a 3% climb from the same quarter the previous year.
While Walgreens painted a rosy picture with its Q2 results, the narrowed full-year outlook implies clouds on the horizon. With a revised earnings projection of $3.20 to $3.35 per share on an adjusted basis, down from the earlier $3.20 to $3.50 range, a concerning shaky consumer spending environment looms ahead. However, many pessimistic clouds seem to have already been factored into Walgreens’ stock price, trading at a modest $20, a mere 6x based on forward projected earnings of $3.28 per share at the midpoint of the company’s guidance.
Comparing Peers and Navigating Forward
As you mull over whether to jump on the WBA bandwagon at $20, it’s prudent to assess how Walgreens’ peers stack up on pivotal metrics. For a broader comparison across industries, consider peeking at Peer Comparisons. This broader perspective could be your guiding light amid the tumult of the market.
| Returns | Apr 2024 MTD [1] | 2024 YTD [1] | 2017-24 Total [2] |
| WBA Return | -10% | -25% | -76% |
| S&P 500 Return | 0% | 10% | 135% |
| Trefis Reinforced Value Portfolio | -1% | 6% | 649% |
[1] Returns as of 4/2/2024
[2] Cumulative total returns since the end of 2016
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The opinions expressed here are the sole viewpoints of the author and not necessarily reflect those of Nasdaq, Inc.
