Walgreens stock is cheap and oversold: is it a value trap?

Walgreens Boots Alliance (WBA) has become a fallen angel, costing investors billions of dollars in the past few years. Its stock has imploded, falling from $69 in 2014 to $9 today, meaning that a $1000 investment at its top would now be worth just $130. On the other hand, a similar investment in the benchmark S&P 500 index would be worth over $2,600.

Major headwinds remain

Walgreens Boots Alliance, the second-biggest pharmacy chain in the US, has gone through substantial challenges in the last decade. 

A closer look, however, shows that some of its most recent problems have also happened across other speciality companies in the US. 

Discount stores like Dollar General, Dollar Tree, and Family Dollar are some of the worst-performing companies in the S&P 500 index this year.

Similarly, Lululemon, one of the best-known players in athleisure, has crashed, while Ulta Beauty, the market leader in the cosmetics industry, has moved into a bear market.

The main issue is that these companies are competing with other national brands like Amazon, Target, and Kroger which have boosted their investments in their respective verticals. For example, a company like Walmart has worked to become a one-stop shop for all pharmaceutical needs.

Competition is coming from other companies as well. For example, a company like Hims & Hers that focuses on several key verticles has done well, with its stock surging by almost 200% in the last twelve months. 

Similarly, pharmaceutical companies have started to sell some products directly to consumers. Eli Lilly has launched Lilly Direct, while Pfizer will launch PfizerForAll. 

Walgreens has also faced other challenges, like retail theft, which has pushed it to lock some of its items. Also, it has had some self-inflicted issues like its large acquisition of VillageMD, which it had to write off earlier this year. 

Walgreens is not the only pharmaceutical retailer that is in trouble. Rite Aid, then the third-biggest player, went bankrupt, while CVS Health’s stock has dropped by over 22% this year.

WBA is cheap for a reason

Walgreens Boots Alliance has become one of the cheapest companies in Wall Street. It has a non-GAAP P/E ratio of 2.70 and a forward multiple of 3. These numbers are significantly below the industry – consumer staples – median of 18.5 and 18.2. The S&P 500 index has a P/E multiple of 21.

The company also has a trailing and forward EV to EBITDA multiples of 10 and 9, which are lower than the industry medians of 12 and 13. 

Therefore, to some investors, Walgreens is a good and undervalued blue-chip company that has a room to engineer a strong turnaround in the future.

As part of the management’s turnaround efforts, the company has laid off staff, closed some stores, remodelled others, and launched strategic options for its Boots business. It hopes to achieve $1 billion in annual savings and cut stores by 25% over three years.

The most recent financial results showed that Walgreens Boots Alliance’s revenue rose by 2.6% in the last quarter to $36.5 billion, while its adjusted operating income fell by 36.3% to $613 million. 

In the first six months of the year, its revenue rose by 6.2% to $110 billion, while its operating loss was $13 billion because of its VillageMD write-off. 

Most importantly, the company lowered its forward guidance for the year, with its EPS expected to come in at between $2.80 and $2.95. It attributed this cut to the “worse-than-expected consumer environment driving higher promotional activity.”

Walgreens also noted that these challenges would persist in the coming year, which explains why the stock has plunged.

Therefore, buying WBA stock now is a bet that the management will do well and turn around the company as challenges remain. Implementing a good turnaround is possible but is expected to take time, as we’ve seen in other similar companies like General Electric.

Analysts are relatively pessimistic about Walgreens, with those at Bank of America, Morgan Stanley, and Barclays having an underweight rating. Others at UBS, Mizuho, and Truist have a neutral rating.

At the same time, Walgreens’ stock has seen an elevated increase in short interest, which hs moved close to 10%. This is a sign that many investors are pessimistic about the company.

Walgreens stock price analysis

WBA chart by TradingView

The weekly chart shows that the WBA share price has been in a strong downward trend for a long time. It crossed the important support level at $27, its lowest point in 2020, and 2022 in July 2023. By moving below that level, the stock invalidated the forming double-bottom pattern.

Walgreens shares have remained below all moving averages while oscillators like the Stochastic, Relative Strength Index (RSI), and the percentage price oscillator show that it has become highly oversold.

Therefore, the path of the least resistance for the stock is downwards, with the next point to watch being at $8. However, with the stock being oversold, a single positive news can push it much higher quickly. The next potential catalyst will come out on October 15, when the company publishes its financial results.

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