Walgreens made headlines on May 13 when its stock rose 5% after reports surfaced that it was in talks with potential buyers for its Boots business, a UK-based drugstore chain valued at around $9 billion. The potential sale of Boots could provide a much-needed boost to Walgreens’ stock, which has been struggling in recent times. Despite the current stock price of around $18, we believe that WBA stock is undervalued.
The past few years have seen a significant decline in Walgreens’ stock, dropping 50% from $40 in early 2021 to around $20 currently. While the stock saw positive returns of 31% in 2021, it underperformed in 2022 and 2023 with negative returns of -28% and -30%, respectively. This underperformance is in contrast to the S&P 500, which saw positive returns over the same period, indicating a challenging environment for individual stocks like Walgreens.
Despite the challenging market conditions, the Trefis High Quality Portfolio, consisting of 30 stocks, has consistently outperformed the S&P 500 each year. This discrepancy in performance can be attributed to the better returns with less risk exhibited by the HQ Portfolio stocks as compared to the benchmark index. With the current macroeconomic uncertainties including high oil prices and elevated interest rates, the future performance of WBA stock remains uncertain.
In terms of valuation, we estimate Walgreens to be valued at $24 per share based on a 7x forward expected adjusted earnings of $3.28. This valuation is slightly lower than the 9x average over the last four years, reflecting the near-term headwinds faced by the company due to weakening consumer demand. However, the potential sale of the Boots business could drive the stock to even higher levels, offering a glimmer of hope for investors.
It is not the first time Walgreens has considered divesting its Boots business, with a previous attempt in 2022 failing due to market conditions and unsatisfactory bids. The company’s international business has been a drag on its overall performance, with stiff competition from online and discount pharmacies impacting its sales. Despite efforts to boost revenue through acquisitions like VillageMD, which faced challenges leading to a major impairment charge, Walgreens continues to face headwinds in the retail pharmacy space.
Overall, Walgreens stock presents a potential opportunity for investors at its current undervalued levels. Trading at just 5x forward earnings compared to the historical average of 10x, WBA stock has potential for future growth. As the company navigates through challenges and explores strategic initiatives like the potential sale of its Boots business, investors will be watching closely to see if Walgreens can turn its fortunes around in the coming months.
