Walgreens Boots Alliance, Inc. (WBA) operates as a pharmacy-led health and beauty retailer. It operates through the Retail Pharmacy USA, Retail Pharmacy International, and Pharmaceutical Wholesale.
The consumer price index data revealed that inflation rose 8.6% in May from the year-ago period, the highest since December 1981. In its efforts to tame the surging inflation, the Federal Reserve has increased the benchmark interest rates thrice this year, with the recent 75 basis-point increase happening to be the most aggressive since 1994.
The Fed has indicated further interest rate hikes to bring down the multi-decade high inflation. Investors are worried that the economy might witness a slowdown if the Fed increases interest rates quickly and aggressively.
In a recessionary environment, people usually cut down on their discretionary spending, but their spending on non-discretionary items like medicines, consumer staples, etc. remains intact. Therefore, WBA is likely to be a recession winner.
Over the last three years, WBA’s dividend payout has grown at a 2.76% CAGR. Its four-year average dividend yield is 3.60%, and its current dividend translates to a 4.67% yield. The stock has lost 21.6% in price year-to-date and 21.4% over the past year to close the last trading session at $40.87.
Here’s what could influence WBA’s performance in the upcoming months:
Robust Financials
WBA’s sales increased 2.9% year-over-year to $33.75 billion for the second quarter ended February 28, 2022. The company’s gross profit increased 13.6% year-over-year to $7.70 billion. However, its adjusted net earnings attributable increased 13.4% year-over-year to $1.37 billion. Its adjusted EPS came in at $1.59, representing an increase of 13.5% year-over-year.
Mixed Analyst Estimates
For fiscal 2022, WBA’s revenue is expected to decline 0.4% year-over-year to $131.96 billion. However, its EPS is expected to increase 2.4% year-over-year to $5.03. Furthermore, for fiscal 2023 its revenue is expected to increase 2% year-over-year to $134.64 billion, but its EPS is expected to decline 2.8% year-over-year to $4.89.
Discounted Valuation
In terms of forward EV/S, WBA's 0.59x is 68.4% lower than the 1.87x industry average. Its forward non-GAAP P/E of 8.09x is 55% lower than the 17.97x industry average. Also, the stock's 14.95x forward EV/EBIT is 6.6% lower than the 16x industry average.
Mixed Profitability
In terms of trailing-12-month gross profit margin, WBA’s 22.02% is 34% lower than the 33.4% industry average. Likewise, its 4.43% trailing-12-month EBITDA margin is 63.3% lower than the industry average of 12.11%.
However, the stock’s trailing-12-month asset turnover ratio came in at 1.48%, which is 81.6% higher than the industry average of 0.82%. Also, its 6.78% trailing-12-month ROA is 44.4% higher than the industry average of 4.70%.
POWR Ratings Show Promise
WBA has an overall rating of B, equating to a Buy in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. WBA has a B grade for Value, in sync with its 0.27x forward P/S, which is 77.6% lower than the 1.2x industry average.
It has a C grade for Quality, consistent with its mixed profitability.
WBA is ranked #2 out of 5 stocks in the B-rated Medical – Drug Stores industry. Click here to access WBA’s ratings for Growth, Momentum, Stability, and Sentiment.
Bottom Line
WBA being one of the world's largest pharma retailers, and given that drugs do not witness a decline in demand, the stock is unlikely to be affected by a recession. Its robust financials and discounted valuation further strengthen the investment case.
How Does Walgreens Boots Alliance, Inc. (WBA) Stack Up Against its Peers?
WBA has an overall POWR Rating of B, equating to a Buy rating. You might want to consider investing in the following Medical – Drug Stores stocks with an A (Strong Buy) rating: CVS Health Corporation (CVS).
WBA shares fell $1.46 (-3.57%) in premarket trading Thursday. Year-to-date, WBA has declined -22.03%, versus a -20.39% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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