Pawns
And the hits proceed.
Walgreens (NASDAQ: WBA) opened the yr buying and selling at $26 and alter. However earlier than the earnings debut final week, the inventory was buying and selling just under $16 a share. Quick ahead a few days and the WBA is now buying and selling for lower than $12 and is now down 56% in 2024.
If there’s an upside to this story, it is that the quarterly dividend is now 8% plus. Veteran buyers could marvel if that is low yield or a possibility to lock in a big supply of passive earnings whereas ready for a doable turnaround.
There’s rather a lot to disclose in Q3 earnings, and maybe an important takeaway from the earnings report is not simply within the numbers.
Evaluation of the earnings assertion
WBA reported 3Q2024 EPS of 0.63 cents (non-GAAP), lacking analysts’ estimates of $0.68. Revenue is $36.4 billion additionally fell wanting the $35.9 billion consensus.
Adjusted working earnings for the retail pharmacy phase was $501 million, down considerably from the $962 million reported within the third quarter of 2023. This was regardless of gross sales growing to $28.5 billion from $27.9 billion.
Walgreens additionally reported an working lack of $13.1 billion for the primary three quarters of this fiscal yr. That is up from $6.4 billion within the first three quarters of 2023.
Word that this determine features a $5.8 billion goodwill impairment cost associated to VillageMD.
Administration now estimates earnings per share for the fiscal yr within the vary of $2.80 to $2.95, effectively under the earlier forecast of $3.20 to $3.35 per share.
Along with its largely horrible monetary outcomes, Walgreens has revealed that it plans to shut what may doubtlessly be a lot of shops. The corporate mentioned {that a} quarter of all shops usually are not worthwhile. Moreover, there’s a vital shrinkage drawback in lots of places.
Administration didn’t disclose the variety of deliberate retailer closings; nevertheless, throughout the earnings name it was said {that a} “good portion” of those idled shops can be closed over the following three years.
We’re at a degree the place the present pharmacy mannequin just isn’t sustainable and challenges in our working atmosphere require us to strategy the market in a different way.
Tim Wentworth, Normal director
One of many challenges the corporate will face is that many shops have lengthy leases.
Throughout the earnings name, the CEO mentioned the proposed sale of Boots’ UK enterprise was once more not into account.
Nonetheless, following a $5.2 billion funding in 2021 to amass a majority stake in VillageMD, WBA and VillageMD administration are actually working to scale back Walgreens’ stake.
Though VillageMD’s initiative appeared promising, the enterprise by no means turned a revenue with out accounting.
Walgreens’ Headwinds
When evaluating WBA as a possible funding, you will need to perceive that almost all of the corporate’s income comes from pharmacies. Walgreens’ in-store choices generate solely a fourth of the agency’s gross sales.
The stiffest headwind the WBA faces is reimbursement charges for pharmaceuticals. This isn’t a brand new dynamic, but it surely has worsened over the previous few years.
PBMs contract with insurers, and therein lies the issue with chain pharmacies like WBA and CVS. The massive three PBMs management about 80% of prescriptions within the US, and one method to decrease prices for insurance coverage corporations and their sufferers is to chop reimbursement charges for corporations like Walgreens.
The query is why do they proceed to cost decrease and decrease reimbursement charges? And the reply is that whereas the contracts are nonetheless worthwhile, PBMs are going to push that proper each time.
John Ransom, an analystRaymond James
Traders ought to perceive that regardless of their obvious ubiquity, chain drugstores make up solely about 35% of drugstores within the U.S. Supermarkets, together with Goal ( TGT ), Kroger ( KR ), Walmart ( WMT ), and Costco ( COST ), additionally function a couple of third of pharmacies on this nation.
Think about that supermarkets use pharmacies to draw guests to their bigger retail operations. Pharmacies for these corporations are virtually the equal of loss leaders. So these retailers do not focus an excessive amount of on the revenue margins they squeeze out of their PBM contracts.
As well as, the elevated use of generics additionally impacts Walgreens’ backside line: in 2009, solely 75% of all pharmaceuticals had been generic. By 2018, the variety of prescriptions for generic medicine within the US had risen to 90%.
The WBA has additionally seen a big improve in foot visitors from these in search of a COVID vaccination, however because the coronavirus eases, the variety of purchasers receiving vaccinations has decreased markedly.
One other destructive that isn’t addressed in both the quarterly experiences or analysts are experiences of worker burnout amongst pharmacists. Outcomes from the Mayo Clinic Properly-Being Index discovered that roughly two-thirds of pharmacy professionals reported affected by “burnout.” This quantity was increased than in some other medical occupation.
Maybe the largest concern about this pattern is that overworked pharmacists usually tend to make errors within the office, and these errors can actually be deadly. One American Public Well being Affiliation researcher estimated that pharmacies make about 2.3 million meting out errors a yr. With that in thoughts, it is not arduous to think about that there may very well be a possible class motion lawsuit on the horizon for my part.
A handful of constructive
Mail-order pharmacies, which some consider pose a critical menace to the likes of WBA and CVS, account for effectively below 1% of all pharmacy operations. As well as, the share of prescriptions crammed by mail-order pharmacies just isn’t rising at a fee that considerably impacts chain pharmacies.
In 2022, the share of prescriptions allotted by mail-order pharmacies reached 9%, in comparison with 7% in 2012. Over the identical interval, chain pharmacies’ share of the US prescription market fell by simply 1%, from 48% to 47%. .
With roughly 13,000 shops in 9 international locations, together with roughly 8,700 within the US, WBA has a big benefit of scale. Moreover, roughly 78% of the US inhabitants lives inside 5 miles of a Walgreens retailer.
WBA Debt, Dividends and Valuation
Walgreens’ credit score scores are BBB from S&P and Ba2 from Moody’s. Commonplace & Poor’s ranking is on the lowest rung of funding grade scores. Moody’s is under funding grade.
Walgreens’ present yield is a hair under 8.27%. Administration lower dividends by 48% within the first quarter of this yr. The present dividend payout ratio is simply over 46%. It is very important notice that in earlier years, administration has said that the long-term goal payout ratio was between 30% and 35%.
Though WBA has the monetary power to proceed paying dividends at present ranges, I seen that there was no point out of dividends both over the past earnings report or the earlier one.
I took a fast take a look at the Walgreens investor relations website and located no details about the dividend. As somebody who typically watches earnings calls when corporations face a turnaround, I am going to notice that administration normally reassures buyers {that a} dividend lower just isn’t on the playing cards. Whereas I will not argue {that a} dividend lower is on the horizon, I discover administration’s refusal to even talk about the dividend disconcerting.
WBA inventory is now buying and selling at $11.73 per share. The typical 12-month value goal of the 19 analysts that comply with the corporate is $15.65. Of those, 4 fee WBA as Promote or Robust Promote, and 12 fee the inventory as Maintain.
The ahead P/E for WBA is 4.24x, effectively under its five-year common P/E of 8.33x. The 5-year PEG ratio is 3.74x.
Is Walgreens a purchase, promote or maintain?
Walgreens’ inventory value has fallen greater than 55% because the begin of the yr.
For those who’re new to the inventory, studying that Walgreens’ complete income grew from $42.2 billion in 2005 to $103.4 billion in 2015 could come as a little bit of a shock. From 2015 to 2022, excluding 2020, when COVID-19 sanctions choked gross sales, Walgreens reported adjusted working earnings of $5 billion or extra yearly.
The corporate’s adjusted working revenue fell to $3.7 billion in fiscal 2023.
To proper the ship, administration is negotiating with well being insurers and PBMs to extend earnings.
Walgreens additionally plans to launch a retail pharmacy initiative aimed toward enhancing the in-store buyer expertise. Retailer closings are on the horizon and the winding down of VillageMD’s enterprise is in full swing.
We perceive that the place we’re is a turning level. We perceive that we have to give attention to the components of the enterprise that we consider are contributing and have a future, and a few of that should change.
Tim Wentworth, CEO
This commentary summarizes the problem buyers face in evaluating WBA as a possible funding. Turnarounds are unsure, normally take years to materialize, and even when profitable, typically result in periodic sharp swings in share costs.
After all, huge swings in inventory costs can convey huge earnings to merchants.
Because of this, I’ve second ideas about ranking WBA as a speculative purchase; nevertheless, after I contemplate that even at a low ahead P/E, the inventory has a 5-year PEG of three.74x, and the truth that administration hasn’t talked about a dividend in not less than two earnings experiences, I feel there’s higher , than there’s a 50/50 likelihood that the inventory has an even bigger draw back.
I fee WBA a Maintain.
I’ve a small funding in Walgreens that I initiated years in the past. I’ve no intention of accelerating this place within the foreseeable future.
