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Walgreens Boots Alliance: A cheap and recession-proof company.

Opdateret: 25. mar.


Walgreens Boots Alliance has faced many challenges lately with the opioid and Rite Aid lawsuits, while their CEO stepped down after less than three years at the helm of the company. Walgreens Boots Alliance could be an interesting investment if we face economic headwinds for a longer period of time, as pharmacies tend to perform better than most other retail businesses during a recession. Does the latest challenges and decrease in stock price make Walgreens Boots Alliance a good investment?


This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.


Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and briefly describe the company and if it has a moat. I have changed the format of the analysis a bit to try to make it shorter and with less numbers. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.


For full disclosure, I should mention that at the time of writing this analysis, I do not own any shares in Walgreens Boots Alliance. If you would like to copy my portfolio or view the stocks in my portfolio, you can find instructions on how to do so here. I don't own shares in any of their direct competitors either, but I have previously held shares in their largest competitor, CVS Health. As always, I will keep this analysis unbiased. If you are interested in purchasing shares of Walgreens Boots Alliance or CVS Health, you have the option to do so through eToro. eToro is a highly user-friendly platform that allows you to start your investment journey with as little as $50.



Walgreens was founded in 1901 in Chicago, United States. In 2014, it merged with Switzerland-based Alliance Boots and became Walgreens Boots Alliance. It is the second-largest pharmacy store chain in the United States, behind CVS Health. They are also present in Europe ,Latin America and Asia. In total, the company has approximately 13.000 locations across the US, Europe, Latin America, and Asia, and employs more than 325.000 people. The company is divided into three segments: U.S. Retail Pharmacy, International, and U.S. Healthcare. The U.S. Retail Pharmacy segment includes Walgreens' business, which comprises operations of retail drugstores, health and wellness services, specialty and home delivery services, and equity investments in AmerisourceBergen. The International segment consists of a pharmacy-led health and beauty retail business outside the U.S., as well as a pharmaceutical wholesaling and distribution business in Germany. The U.S. Healthcare segment is a consumer-centric, technology-enabled healthcare business that engages consumers through a personalized, omni-channel experience. The U.S. Retail Pharmacy is by far the largest segment, contributing approximately 79% of the sales, compared to approximately 16% in International and 5% in U.S. Healthcare. With its long history, Walgreens Boots Alliance has built a strong brand moat because of the trust among its customers.


Their CEO is Tim Wentworth. He joined Walgreens Boots Alliance as CEO in October 2023. Prior to joining Walgreen Boots Alliance, he held positions as CEO at Evernorth and Express Scripts. He is particularly known for his role as CEO of Express Scripts, where he successfully grew the company into a Fortune 22 company with over $100 billion in revenue and 26.000 employees. Express Scripts also ranked at number 66 on Forbes Magazine's list of the World's Most Innovative Companies. He has almost 30 years of experience in the healthcare industry, which should benefit Walgreen Boots Alliance in their transition into a full healthcare company. When he was appointed as CEO of Walgreens Boots Alliance, he was described as an accomplished and respected leader with profound expertise in the payer and pharmacy sectors, as well as supply chain, IT, and human resources. His goal for Walgreens Boots Alliance is to deliver more personalized, coordinated care and achieve better outcomes at a lower cost. He has a bachelor's degree in Industrial and Labor Relations from Cornell University's School of Industrial and Labor Relations, and an honorary doctorate degree from the State University of New York. We cannot judge Tim Wentworth as the CEO of Walgreens Boots Alliance, as he has only just been appointed. However, I believe he has the experience and credentials necessary to be a good fit for Walgreens Boots Alliance moving forward.


I believe that Walgreens Boots Alliance has a brand moat. I will give management the benefit of the doubt due to their vast experience in the industry and their previous results. Now, let us investigate the numbers to determine if Walgreens Boots Alliance meets our criteria for having a strong competitive advantage. In case you want an explanation of what the numbers represent, you can refer to "MY STRATEGY" on the website.


The first number I will investigate is the return on invested capital, also known as ROIC. Ideally, you would like to see a return on invested capital (ROIC) above 10% in all years. The return on invested capital (ROIC) of Walgreens Boots Alliance has been underwhelming in most years. Only four times in the last ten years have they managed to deliver a return on invested capital (ROIC) above the required 10%. We have experienced a pandemic that may have affected their business, as evidenced by the fiscal year 2020 results. Additionally, the opioid settlement has impacted the return on invested capital (ROIC) in 2023. Walgreens Boots Alliance has also made acquisitions in 2021 (Shields and VillageMD) and 2022 (CareCentrix), which will impact the figures. Prior to 2023, we saw an encouraging sign in fiscal 2022, where Walgreen Boots Alliance managed to increase its return on invested capital (ROIC) to above 10%, a level that had not been seen since the pandemic. I won't give too much importance to the 2023 numbers due to the opioid settlement. Nonetheless, the return on invested capital (ROIC) has been mostly underwhelming when we consider the past 10 years.



The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the percentage growth year over year. The numbers are a bit underwhelming, as equity has slowly decreased since its peak in 2015. We saw some encouraging signs in 2021 and 2022, where the equity grew in both years. However, in 2023, there was a significant decrease in equity value, marking the lowest point in the past ten years. This decline can be attributed to the opioid settlement.



Finally, we will investigate the free cash flow. In short, free cash flow refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow margin is important because I believe it provides a more meaningful measure of the free cash flow. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. Free cash flow peaked in 2018 and has since declined, which is not exactly an encouraging sign. However, management has stated that they expect significant growth in free cash flow in the future. The levered free cash flow margin has never been high and has also significantly decreased. However, if we exclude 2023, which is an outlier due to the opioid settlement, the free cash flow yield has been higher than in previous years. This suggests that Walgreens Boots Alliance has been trading at an attractive valuation. But we will get back to that later in the analysis.



Another important aspect to consider is the level of debt, and it is crucial to determine whether a business has a manageable debt that can be repaid within a 3-year period. This can be assessed by calculating the ratio of long-term debt to earnings. However, since earnings were negative in 2023, we cannot make that calculation. Based on the 2022 numbers of Walgreens Boots Alliance, the calculation shows that the company has 2,45 years of earnings in debt, which is below the limit of 3 years. Thus, debt is not an issue for Walgreens Boots Alliance. Furthermore, management has prioritized paying off debt in fiscal 2023, which is a good sign.



Like every other investment, there are risks associated with investing in Walgreens Boots Alliance. One risk is competition. In its annual reports, Walgreens Boots Alliance states that the retail pharmacy industry worldwide is highly competitive and dynamic. It has undergone consolidation and is facing an evolving competitive landscape. While CVS Health is their largest competitor, other companies such as Amazon have entered the industry with Amazon Pharmacy. With their expertise in e-commerce, Amazon could potentially change the competitive landscape. Another risk is the decline in sales of high-margin categories. Walgreen Boots Alliance is experiencing declining sales in high-margin categories such as cough, cold, flu, seasonal, and COVID-19 test kits. While categories such as cough, cold, and flu fluctuate in every respiratory season, management has mentioned that they have experienced a continued shift in consumer behaviors driven by a challenging macroeconomic environment. Furthermore, Walgreens Boots Alliance has experienced an 80% decline in COVID-19 test kits, and as COVID-19 seems to be becoming less prevalent, sales of COVID-19 test kits will continue to decrease. Another risk is that the U.S. retail pharmacy contributes to the majority of sales. According to the annual report, Walgreens Boots Alliance derives a significant portion of its sales in the U.S. Retail Pharmacy segment from prescription drug plans administered by a limited number of pharmacy benefit management companies. These contracts with pharmacy benefit management companies expire, and there is no guarantee that these contracts will be extended at the same or higher price, or extended at all. Hence, if contracts are not extended, it could have an impact on the performance of Walgreens Boots Alliance.


There is also a lot of potential for Walgreens Boots Alliance moving forward. One is a continuous return to shareholders. As I write this, Walgreens Boots Alliance has recently reduced its dividend by 48%, which is never pleasant to see. However, it could be beneficial for investors in the long term. Walgreens Boots Alliance is still paying a high dividend, with a dividend yield above 4%. Walgreens Boots Alliance has repurchased a significant number of shares since 2015 when they reached their highest level of outstanding shares at 1.092 million. Since then, they have bought back shares at a high rate and now have 862,342 shares outstanding. It is an approximately 21% decrease in shares. However, they do not currently have a buyback program. Another reason to invest in Walgreens Boots Alliance is that it is recession-proof. Walgreens Boots Alliance has a long history and has weathered its share of recessions, yet the company still stands strong. Walgreens Boots Alliance has experienced lower sales in high-margin categories this year. However, the stock's price action varies from one recession to another. In some recessions, the stocks have followed the markets downward, while in other recessions, they have barely moved. However, if we examine the company rather than focusing solely on the price action of the stock, we can observe that it has maintained a relatively stable revenue during all recessions. And while the stock of Walgreens Boots Alliance may not surge during a recession, the dividend seems safe, and you can collect a 9% return per year while you wait. The U.S. healthcare segment could be a growth machine. The U.S. healthcare segment is growing at a fast pace. Sales grew by 266% from fiscal year 2022 to fiscal year 2023. And management has raised guidance for the segment moving forward, as they now expect the segment to deliver $14,5B to $16,0B in sales for fiscal 2025, which is significantly higher than the $6,5B in sales in fiscal 2023. Furthermore, management expects the segment to be profitable by the end of this fiscal year.



Now it is time to calculate the price of shares in Walgreens Boots Alliance. I perform three different calculations that I learned at a Phil Town seminar. The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. Walgreens Boots Alliance had a negative EPS in fiscal 2023. However, management expects an EPS of about 3,35 in fiscal 2024. Thus, I have decided to use an EPS of 3,35. I have selected a projected future EPS growth rate of 5%, which is the analysts' consensus. Additionally, I have chosen a projected future P/E ratio of 10, which is twice the growth rate. This decision is based on the fact that Walgreens Boots Alliance has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $13,49. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Walgreens Boots Alliance at a price of $6,75 (or lower, obviously) if we use the Margin of Safety price.


The second calculation is called the Ten Cap price. The rate of return that an owner of a company (or stock) receives on the purchase price of the company is essentially its return on investment. The return should be at least 10% per year. However, as Walgreens Boots Alliance has a negative tax provision in fiscal year, the numbers will be negative once we deduct the capital expenditures and tax provisions from the cash from operations. We cannot make the calculations based on fiscal 2023. If we calculate based on the fiscal 2022 numbers, the calculation would be as follows: The operating cash flow last year was 3.293 and capital expenditures were 1.890. I attempted to review their annual report to determine the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated for maintenance purposes. This means that we will use 1.323 in our calculations. The tax provision was -1.752. We have 862,342 outstanding shares. Hence, the calculation will be as follows: (3.293 – 1.323 - 1.752) / 862,342 x 10 = $2,53 in Ten Cap price.


The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Walgreens Boots Alliance's Free Cash Flow Per Share at $0,16 and a growth rate of 5%, if you want to recoup your investment in 8 years, the Payback Time price is $1,60. If we calculate based on the $2,51 free cash flow per share in 2022, the Payback Time price would be $25,17.


Walgreens Boots Alliance is a robust company with a track record of operating successfully in various economic environments. Management is still new, which means that there are some doubts. However, the CEO does have vast experience in the industry and has achieved great results in the past. Therefore, I feel confident in his ability to lead Walgreens Boots Alliance in the future. Walgreens Boots Alliance is facing some short-term headwinds, which have led to a decline in sales of high-margin categories. Furthermore, they have also recently agreed to a settlement in the opioid litigation, which had a significant impact on the numbers in fiscal 2023. More long-term risks arise from operating in a competitive environment while being dependent on pharmacy benefit management companies, but this is not a new challenge for Walgreens Boots Alliance. If considering Walgreens Boots Alliance as a potential investment, I find the U.S. Healthcare segment intriguing. If the company successfully expands this segment, it could present an interesting investment opportunity. While we have seen a recent dividend cut, Walgreen Boots Alliance can currently be purchased at a +4% dividend yield, and they are also trading below their book value per share at $23,19. Despite this, the historically low return on invested capital (ROIC) and the decline in free cash flow make me uninterested in investing in Walgreens Boots Alliance.


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