Since hitting all-time highs more than five years ago, it’s been death by a thousand cuts for shares of Walgreens Boots Alliance (NASDAQ: WBA)
, the $30 billion pharmaceutical manufacturer and wholesaler. Shares have trickled lower by 65% since then with little resistance and are trading at similar prices to where they were at the turn of the millennium.
However, over the past three sessions shares have jumped more than 10% and are back above their 50 day moving average for the first time in months. While they still have a long way to go before being able to convince Wall Street that they’re as good as they used to be, the time could be right for them to start getting there. And for the investor who can handle a bit of risk, that means there’s potential to get in on the ground floor of a major recovery play.
The company’s fiscal Q4 earnings last month gave us a look at the internal numbers and they were good. EPS and revenue both came in ahead of analyst expectations as did their operating and gross margins. Operating income was down 26% year on year but the company estimated that COVID was responsible for holding that back by 34%. But while the coronavirus pandemic certainly did them no favors, Walgreens’ e-commerce performance were particularly promising and highlighted the lengths that management has gone to turn the ship around.
Management still struck a cautious tone in terms of outlook through the next 6 months as COVID remains a headwind, but after that they’re expecting to see strong EPS growth and this is what should get the bulls excited. To that end, they announced plans to invest heavily in their omnichannel potential as well as their offerings across retail and healthcare. They’ll also be expanding their COVID testing capabilities while at the same time preparing to be a go-to location for COVID vaccinations, whenever they become available. In further good news, investors were also told that the company’s cost management program is still on track to deliver more than $2 billion in annual cost savings by 2022.
CEO Stefano Pessina said with the release; "we are seeing gradual improvement in key U.S. and UK markets and continued strong performance in our wholesale business. I'm also encouraged by the accelerating growth in our e-commerce platforms. Now, more than ever, our pharmacy-centered business is at the heart of community healthcare and we are expanding on that role for the future."
Bright Days Ahead
These are all good, fundamental boxes for potential investors to be checking and suggest that if management can keep doing the right things, then the share price will start to reflect that very soon. For investors willing to get involved, there’s a juicy 5% dividend yield to reward them for their patience.
To be sure, this is still a recovery story that hasn’t even started yet and there are plenty of challenges ahead. For example, Walgreens must continue developing its e-commerce channels to compete with newer and fresher online services. Failing to do so here could confine them to the dust heap as another dinosaur that couldn’t modernize fast enough.
But having said that, expectations are about as low as they could be and, as mentioned above, shares are trading at prices from 2000. That allows for significant upside if the company can continue to do the simple things right. It’s not so long ago that the stock was trading for close to $100 a share so investors know what it’s capable of. If the next couple of earnings come in ahead of expectations, the recovery could well and truly be on.
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