Walgreens stock (NYSE: WBA) has seen a significant decline, currently trading at $17 per share, about 70% below its level in April 2021. This underperformance can be attributed to slowing sales growth and profitability issues, including opioid-related settlements and impairment charges. Despite this, the stock did see higher levels after reports of potential buyers for its Boots business emerged.
While WBA stock has suffered a 60% decline from levels of $40 in early January 2021 to around $15 now, it has seen fluctuations in returns over the years. The stock underperformed the S&P 500 in both 2022 and 2023. Beating the S&P 500 has been difficult for individual stocks in recent years, but the Trefis High Quality Portfolio has consistently outperformed the benchmark index.
Given the uncertain macroeconomic environment with high oil prices and elevated interest rates, the question arises of whether WBA could face a similar situation as in 2022 and 2023 and underperform the S&P over the next 12 months. However, the stock appears undervalued at its current price of $16. Our estimate puts Walgreens’ valuation at around $24 per share, 45% above its current market price. This is based on a 7x forward expected adjusted earnings of $3.28.
The inflation shock of 2022 has impacted the market significantly, with the S&P 500 index declining more than 20% from peak levels in June 2022. The Fed’s aggressive interest rate hikes have led to market volatility, with fluctuations in performance. Looking back at the 2007-08 crisis, we see how WBA stock and the broader market performed during that time.
Walgreens’ fundamentals show an increase in revenue in the last twelve months, partly due to its acquisition of VillageMD. However, sales growth has slowed in recent quarters. The company has a total debt of $34 billion and cash of around $4 billion, which should allow it to meet its near-term obligations. While there are risks such as macroeconomic issues and high debt levels, much of these factors are already priced into the stock.
Overall, with the Fed’s efforts to tackle inflation and improve market sentiment, Walgreens stock has the potential for gains once recession fears are allayed. Investors may benefit from buying WBA in this dip for long-term gains. Despite the challenges faced by the company, its undervalued status and potential for recovery make it an attractive investment option.
