Walgreens Boots Alliance: A cheap and recession proof company.
Opdateret: 27. mar.
The stock of Walgreens Boots Alliance is currently trading near its book value per share at $29,24, and while it does face some challenges, it could be a good investment in the current economic environment. In this analysis I will investigate the company to see if now is the time to buy the stocks.
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 shares in Walgreens Boots Alliance . If you would like to copy my portfolio or see the stock in my portfolio, you can read about 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.
Walgreens was funded 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, while they also present in Europe and Latin America. In total the company has approximately 13.000 locations across the US, Europe, and Latin America, 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 is comprised by operations of retail drugstores, health and wellness services, specialty and home delivery services and equity investments in AmerisourceBergen. The International segment consists of pharmacy-led health and beauty retail business outside the U.S. and the 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 as contribute with approximately 82 % of the sales, compared to approximately 16 % in International, and 2 % in U.S. Healthcare. With its long history, Walgreens Boot Alliance has a brand moat as customers trust the brand.
Their CEO is Rosalind Brewer. She joined Walgreens Boot Alliance as a CEO in March 2021. Prior to joining Walgreen Boot Alliance, she was the COO of Starbucks and has also held various positions at Walmart and Kimberly-Clark. She also has experience from serving on the board of directors at companies such as Amazon, Lockheed Martin Corporation and Molson Coors Brewing Company. She holds a bachelor's degree in chemistry from Spelman College, while she has also graduated from the Director's College at the University of Chicago Booth School of Business/Stanford Law School and the Advanced Management Program from The Wharton School, University of Pennsylvania. She is currently ranked 7 on Fortune's 50 Most Powerful Women in Business and was named one of 25 most influential women by the Financial Times in 2021. She believes that it is very important learning a business thoroughly, which is exemplified when she left her position as president in Kimberly -Clark, to take a lower-level position in Walmart. She has commented on that saying that she was in learning mode and needed to take a step back to get ahead, and she credits the move as to when she really gets to know about retail. Rosalind Brewer is still new to the position, meaning that it is hard to determine if she is the right person for Walgreens Boot Alliance. However, I like how she is focused on learning the business, and I think her experience from some of the largest companies in the world will be good for Walgreens Boot Alliance moving forward. Hence, I will give her the benefit of the doubt.
I believe that Walgreens Boot Alliance has a brand moat. I will give management the benefit of the doubt due to her vast experience from some of the largest companies in the world, and because I like how she face a challenge. Now let us investigate the numbers to see if Walgreens Boot Alliance lives up to our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.
The first number I will investigate is the return on investment capital, also known as ROIC. Ideally, you would like to see a ROIC above 10 % in all years. The ROIC of Walgreens Boot Alliance has been underwhelming in most years. Only twice in the last ten years have they managed to deliver a ROIC above the required 10 %. We have had a pandemic that can have affected their business, which we can see in fiscal 2020. Walgreens Boot Alliance have also done acquisitions in 2021 (Shields and VillageMD) and 2022 (CareCentrix), which will influence the numbers. An encouraging sign is that ROIC has increased slightly in fiscal 2022 compared to fiscal 2021, but I would like to see much higher numbers moving forward.
The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. The numbers are a bit underwhelming as well as equity has slowly decreased since its high in 2015. However, like with the ROIC, we see some positive signs in the last year and hopefully Walgreens Boots Alliance will continue to grow their equity in the coming years.
Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has left remaining after paying all of its financial obligations, I use the margin for it to make more sense. Free cash flow yield is the free cash flow per share a company is expected to earn against its market value per share. It is curious to see that free cash flow has decreased in the last year, which is different from the other numbers that we have looked at. I would like to see a much higher levered free cash flow, while the free cash flow yield indicates that the company is cheap.
Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years by calculation long-term debt to earnings. Doing the calculation on Walgreens Boot Alliance, I can see that Walgreens Boot Alliance has 2,45 years earnings in debt, which is way below the limit of 3 years. Thus, debt isn't an issue for Walgreens Boot Alliance.
Like every other investment there are risks when investing in Walgreens Boot Alliance. One risk is competition. In their annual reports, Walgreens Boot Alliance writes that the retail pharmacy industry across the globe is highly competitive and dynamic and has experienced consolidation and an evolving competitive landscape. While CVS Health is their largest competitor, other companies such as Amazon has entered the industry with Amazon Pharmacy, and with their expertise in e-commerce, it could change the competitive landscape. Another risk is declining sales. In their latest quarterly report, we saw that sales have declined from $33.901 in the first fiscal quarter in 2022 to $33.382 in the first fiscal quarter in 2023, which equals an approximately -1,5 % decline. While a -1,5 % decline may not be something to worry about it, it is something we could see more as we are getting out of the pandemic, as we see less Covid-19 tests being made. Furthermore, customers change to lower margin self-tests rather than being tested by Walgreens Boot Alliance. Another risk is that the U.S. Retail Pharmacy contributes to most of sales. According to the annual report, Walgreens Boot Alliance derive a significant portion of their 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 expires 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 affect the results of Walgreens Boot Alliance.
There are also a lot of potential for Walgreens Boot Alliance moving forward. One is continuous return to shareholders. As I write this Walgreens Boot Alliance is paying a dividend yield of more than 5 %, and nothing suggests that they are going to cut the dividend. Walgreens Boot Alliance has also bought back plenty of shares since 2015, where they reached the highest shares outstanding at 1.092m. Since then, they have bought back shares at a high rate and now has 862,342 shares outstanding. It is an approximately -21 % decrease in shares, they don't currently have a buyback program though. Another reason to invest in Walgreens Boot Alliance is that it is recession proof. Walgreens Boot Alliance has a long history and has seen its share of recession, yet the company is still here. While the stock in some recession has followed the markets down, it has barely moved in other recessions. However, if we look at the company instead of the price action of the stock, it has kept revenue quite stable through all recessions. And while the stock of Walgreens Boot Alliance may not surge during recession, the dividend seems safe, and you can collect those 5 % a 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. In the latest quarterly earnings, the revenue of the segment increased by 38 % year over year. And management has just 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 $11,0B to $12,0B that management guided previously. Furthermore, management expects to the segment to be profitable by the end of this fiscal year.
All right, we have gone through the numbers, potential and risk regarding Walgreens Boot Alliance, and now it is time for us to calculate a price for Walgreens Boot Alliance. To calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use an EPS at 4,55, as management expects an EPS between 4,45 and 4,65. I chose an Estimated future EPS growth rate of 9 % (management expects 8 to 10 % growth), Estimated future PE 18 (which the double of the growth rate, as the historically PE for Walgreens Boot Alliance has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY", we come up with the sticker price (some call it fair value or intrinsic value) of $47,93, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy Walgreens Boot Alliance at price of $23,97 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions. The Operating Cash Flow last year was 3.293. The Capital Expenditures was 1.890. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 1.323 in our further calculations. The Tax Provision was -1.752. We have 862,342 outstanding shares. Hence, the calculation will be like this: (3.293 - 1.323 - 1.752) / 862,342 x 10 = $2,53 in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 2,50 and a growth rate of 9 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $30,08.
Walgreens Boot Alliance is a solid company, as it has a history operating in all sorts of economic environments. Management is still new, which means that there are some doubts. However, the CEO does have experience from some of the largest companies in the world and I feel comfortable with her leading Walgreens Boot Alliance moving forward. Walgreens Boot Alliance is facing some short-term headwinds, which has resulted in a decrease in sales. Furthermore, they have also just agreed to a settlement in the opioid litigation, which I didn't mention in this analysis, in which they will pay $5,7 billion over the next 15 years. More long-term risks are that they are operating in a competitive environment while they are dependent on pharmacy benefit management companies, but it is nothing new for Walgreens Boot Alliance. If looking at Walgreens Boot Alliance as a potential investment, I find the U.S. Healthcare segment intriguing, and if they manage to grow it, it could be an interesting investment. I may open a position if Walgreen Boots Alliance reached the Margin of Safety price of $23,97, as I think the sector is a good place to be in the foreseeable future.
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