Shares of Walgreens Boots Alliance (WBA - Free Report) are down 16.5% over the last year based mostly on Amazon (AMZN - Free Report) fears. There is no doubt that online selling and delivery have altered the retail world, but does that mean Walgreens can no longer compete? Let’s dive into some of WBA’s fundamentals to see what to do with the stock.
Amazon is set to acquire online and delivery pharmacy startup PillPack for $1 billion in cash, in a deal that is expected to close in the second half of 2018. PillPack’s co-founder and CEO TJ Parker said last fall that the company had tens of thousands of customers and was set for more than $100 million in annual revenue.
The late June announcement sent shares of pharmacy giants CVS (CVS - Free Report) , Rite Aid (RAD - Free Report) , and Walgreens tumbling. But the question is, how quickly can Amazon infiltrate the industry with a pharmacy firm that boasted just tens of thousands of customers? Walgreens alone claims 13,200 stores in 11 countries, with whole distribution centers delivering to more than 230,000 pharmacies—as of August 2017.
Amazon does already sell its own private-brand, over-the-counter drugs, called Basic Care, selling 65 drugs at costs that were roughly 20% less than Walgreens and CVS. Yet, Amazon is far from overtaking the approximately $400 billion U.S. pharmaceutical industry.
Investors should also note that fears the e-commerce giant would destroy the grocery industry have been largely overblown to this point as Kroger (KR - Free Report) , Walmart (WMT - Free Report) , Costco (COST - Free Report) and Target (TGT - Free Report) have adapted to the times and pushed out their own online portals, delivery options, and meal-kits. The pharmaceutical and drug industry is much different than the grocery business, for an array of reasons, but Walgreens and others are just as capable of fighting back against Amazon’s pharmaceutical invasion.
In fact, Walgreens CEO Stefano Pessina said on a conference call that his company is “not particularly worried” about Amazon’s PillPack acquisition. “The pharmacy world is much more complex than just delivering certain pills or packages,” he continued. “I strongly believe that the role of the physical pharmacy will continue to be very, very important in the future.”
Walgreens reported strong fiscal third-quarter results on June 28, topping Wall Street estimates and posting solid year-over-year gains. The company is also upbeat about its purchase of 1,932 Rite Aid stores.
Furthermore, Walgreens is ramping up its delivery, and currently offers an array of shipping and delivery options. Meanwhile, just last week, it announced that its 40% acquisition of a leading retail Chinese pharmacy chain, Sinopharm Holding GuoDa Drugstores Co, was approved—which could prove to be a great investment. And the company recently introduced a new $10 billion share repurchase program that helps indicate its focus on driving long-term stockholder value, and that its stock price looks pretty cheap at the moment.
Price Movement & Valuation
Shares of WBA are up 88% over the last 10 years, which falls below the S&P 500’s 128% climb. And over the last three years, Walgreens has seen its stock price tumble 31%, with a 14% decline in the last three months alone.
With that said, shares of WBA sit roughly $20 below their 52-week high of $83.89. This means Walgreens stock is relatively inexpensive at face value.
Diving a little deeper, investors will note that Walgreens presents rather strong value at the moment. WBA is currently trading at 9.9X forward 12-month Zacks Consensus EPS estimates, which marks a substantial discount compared to its industry’s 16.2X average.
Furthermore, Walgreens stock has traded as high as 23.3X over the last year, with a one-year median of 15.8X. Walgreens stock is also trading almost directly in line with its year-long low, which is its lowest earnings multiple over the last five years. Therefore investors should be able to say with some confidence that WBA appears rather cheap at its current level.
Walgreens is also expected to continue to experience strong top and bottom line growth. Our current Zacks Consensus Estimates are calling for its quarterly revenues to climb by over 11% to hit $33.51 billion. The company’s top line is expected to expand by 10.8% to touch $131.02 billion for its current fiscal year.
Moving onto the other end of the income statement, Walgreens is projected to see its adjusted quarterly earnings pop by 10.7% to reach $1.45 per share, while its full-year EPS figure is expected to expand by 17% to reach $5.97.
Walgreens is currently a Zacks Rank #3 (Hold) that sports an “A” grade for Value and a “B” for Growth in our Style Scores system. With all that said, WBA looks like it might be worth considering at the moment based on its outstanding valuation picture and growth outlook.
Lastly, investors should expect Walgreens to adapt in order to better compete going forward. And let’s not forget the company is a dividend payer, with a yield of 2.8%.
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