The Rally in Walgreen’s Boots Alliance May be Short Lived

Key Points

• A double beat on the company’s earnings report sent WBA stock up more than 6%. 
• The bounce appears to be more of a relief rally based on the company’s guidance. 
• The underlying fundamentals still show sluggish growth. 
• Without more growth WBA stock may be reaching value trap levels.  

Shares of Walgreens Boots Alliance (NYSE: WBA) are up more than 6% after the company posted a double beat in its fourth quarter earnings report. The company wrapped up its fiscal year with earnings per share (EPS) of 80 cents on revenue of $32.45 billion. That beat analysts’ expectations for an EPS of 71 cents and revenue of $32.15 billion.  

This made it eight straight quarters that Walgreen’s has surpassed analysts’ estimates. And yet, WBA stock still seems to be flashing a caution signal. And that may mean this current bump in the stock price will be short-lived.  

This Time Good News Was Good News 

For weeks, the markets have been selling on good news and climbing on bad news. However, the Walgreen’s report is giving investors something to believe in. Specifically, the company issued full-year earnings guidance in the range of $4.45 to $4.65 per share. Analysts are forecasting full-year EPS of $4.53.  

That means Walgreen’s number is, perhaps, the first sign that the earnings recession being widely forecasted will not be as bad as feared. Or, at the very least, may hold off until after the holiday season. In fact, that may be one reason the entire market seemed to get a lift for the day. 

Still, WBA stock is down 6% for the month and 28% for the last 12 months. That means it’s posting a worse loss than the S&P 500 and the Dow Jones Industrial Average (DJIA). And therein lies the concern for investors.  

Growth Remains a Challenge 

Beating estimates is encouraging, but it doesn’t mean that Walgreen’s is undervalued. The problem for Walgreen’s is the underlying trends. 

For example, revenue was down sequentially in every quarter this year. And each of those quarters was down from the same quarter in the prior year.  

Ok, you say but 2021 isn’t a fair comparison. But if you back it up to 2020, the revenue is still lower. In fact, investors would have to go back to the end of 2017 to start finding comparable revenue numbers. 

And the picture for earnings is even worse. Except for the quarter that aligned with the beginning of the Covid-19 pandemic, the company hasn’t posted an earnings number of below $1 since 2015.  

Both the revenue and earnings numbers are consequences of the company’s operating margins which are down over the last 10 years. And the outlook for both in the next five years is essentially flat. 

All is not bad news, however. Walgreen’s is still generating a healthy amount of free cash flow. But even there the trend is going in the wrong direction. As a percentage of its net income, it’s down almost 15% in the last three years.  

Not a Value Trap...Yet 

With a dividend yield of just under 6% (5.88%) as of this writing, Walgreens’ stock is sure to catch the attention of many income-oriented investors. After all, the company is a dividend aristocrat with 46 consecutive years of dividend increases.  

And with a 12% free cash flow yield, the dividend looks safe.  

Plus, the company is trading at an almost ridiculously low price-to-earnings (P/E) ratio of 5.4x, it’s not wrong to believe there’s value in owning WBA stock. But without evidence that the company can find a way to change around the growth story, it’s becoming hard to do anything other than to put the stock on a watch list.