Walgreens (NASDAQ:WBA) saw its stock rise 5% on Monday, May 13, following the reports that it has contacted potential buyers for the Boots business. Boots is a UK-based drugstore chain, and it could be valued at around $9 billion. If Walgreens succeeds in the sale of Boots at a valuation above $9 billion, it will likely provide a boost to its stock, which has been an underperformer lately. Either way, we think WBA stock is undervalued at its current levels of $18.

WBA stock has suffered a sharp decline of 50% from levels of $40 in early January 2021 to around $20 now, vs. an increase of about 40% for the S&P 500 over this roughly three-year period. However, the decrease in WBA stock has been far from consistent. Returns for the stock were 31% in 2021, -28% in 2022, and -30% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that WBA underperformed the S&P in 2022 and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector including WMT, PG, and COST, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could WBA face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months — or will it see a recovery? From a valuation perspective, WBA stock looks like it can see higher levels over time. We estimate Walgreens’ Valuation to be $24 per share, based on a 7x forward expected adjusted earnings of $3.28. Walgreens expects its adjusted earnings to be in the range of $3.20 and $3.35 in 2024. The 7x P/E multiple is slightly below the 9x average over the last four years. A slight decline in valuation multiple seems justified, given the near-term headwinds from weakening consumer demand. However, the sale of the Boots business could take the stock to even higher levels.

This is not the first time Walgreens is looking to exit the Boots drugstore. The company wanted to divest its Boots U.K. business in 2022, but later 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. Back then, the company’s international business was a drag on its performance, with total sales (pharmacy and retail) declining 7% between 2019 and 2021. The rise of online and discount pharmacies resulted in stiff competition, weighing on Walgreens’ international business. Amazon’s entry into pharmacy doesn’t bode well for retail pharmacies, either. Walgreens has been focused on expanding its online and primary care offerings to aid revenue growth. The VillageMD acquisition in 2021 was a step in that direction. However, VillageMD had to shut operations at hundreds of clinics in an effort to cut costs and boost profitability. Furthermore, Walgreens recorded a $5.8 billion impairment charge related to its VillageMD investment in the previous quarter.

Overall, Walgreens stock looks undervalued at its current levels of around $18, irrespective of the Boots deal. It currently trades at just 5x forward earnings, versus the average of 10x over the last four years.

While WBA stock looks like it can 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.

[1] Returns as of 5/14/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.