With stock trading at a multi-year low, leading to a dividend yield of almost 12%, Walgreens Boots Alliance (NASDAQ: WBA) has likely appeared on some value investors’ radar. As a result, some of them may be considering investing in the stock at this level.
Before making a decision on Walgreens, investors may want to review five things about this company that could influence their choice.
1. Stocks are down 85% in the last ten years
The stock has lost about two-thirds of its value so far in 2024, but Walgreens’ woes extend well beyond this year. The stock has lost 85% of its value over the past ten years and is now at the same level as in 1996.
Shares of Walgreens hit an all-time high of $96.68 in August 2015, but have gone downhill since then. The high point came after it bought the remaining 55% stake in British pharmacy Alliance Boots just before the end of 2014.
2. The pressure on refunds has been the company’s biggest problem
The biggest problem Walgreens faces is the continued pressure on prescription drug reimbursement, which the company has been exerting since early 2016. Drug reimbursement prices have been pushed down by pharmacy benefit management companies (PBMs), which have historically been hired to negotiate prices and lower costs for their health insurers.
Today, however, the industry is controlled by three PBMs, all of which are now owned by companies that also own health insurers. Together they control almost 80% of the market and have ruthlessly cut pharmacy reimbursements, to the point where in some cases pharmacies are losing money by filling certain scripts. For its part, Walgreens has said it loses more with every script it fills for popular GLP-1 drugs, such as Ozempic.
The pressure on reimbursements has been reflected in Walgreens’ gross margins over time. Over the past decade, gross margins have increased from 28.2% in fiscal 2014 to 19.5% last fiscal year ending August 2023. The company will report its fiscal 2024 results next month.
This has not only hurt Walgreens, but also smaller independent pharmacies. CFS health has done better than most companies, but that’s because it not only owns a pharmacy, but also the largest PBM with Express Scripts, and health insurer Aetna.
Right now the reimbursement model is broken and destroying the pharmaceutical industry. Current Walgreens CEO Tim Wentworth, in turn, hopes to transition reimbursements to a cost-plus model, under which pharmacies would be paid for the role they play in helping reduce inflationary pressures on drug prices and drug prices. services they provide. Wentworth was previously CEO of Express Scripts, so he knows the PBM business and its relationship with pharmacies better than anyone.
It doesn’t seem like it would be beneficial for PBMs to just let pharmacies go completely out of business, but change takes time. Meanwhile, government regulators have largely been silent about seeing this happening and seem more concerned about battling antitrust law with big tech companies.
3. Walgreens made a bad investment in VillageMD
In an effort to expand beyond pharmacies facing reimbursement pressures, former Walgreens management also made a very bad investment when it bought a controlling stake in VillageMD, an owner of primary care medical clinics that itself gobbled up other competitors in an effort to exit to expand. The plan was for Walgreens to create a network where it could control the continuum of care, from the doctor to the pharmacy and everything in between.
However, VillageMD’s expansion beyond its original markets proved unprofitable, and the company began closing clinics as losses began to pile up. To make matters worse, Walgreens revealed this summer that VillageMD had defaulted on a $2.25 billion secured loan it made to the company. Meanwhile, Walgreen management said the company would consider selling some or all of its stake in VillageMD.
4. The company plans to close unprofitable locations
As part of Walgreens’ turnaround strategy, the company plans to close a significant number of store locations in the coming years. It indicated that almost 25% of its locations are unprofitable and that it will look to close stores that are too close together, unprofitable and/or have too many theft issues.
Closing unprofitable stores should lead to addition by subtraction and also an increase in same-store sales reports as some sales move to nearby stores. With lower fixed costs from fewer stores, this should lead to better profitability in the long term.
Meanwhile, the pharmacy sector as a whole is shrinking its store base, with CVS closing stores in recent years Ritual aid is expected to close up to 500 locations after filing for Chapter 11 bankruptcy protection last year. More sales in fewer stores should ultimately help the pharmacy industry and Walgreens.
5. The shares look incredibly cheap
Walgreens’ struggles have sent the stock into deep discount territory. It trades at a forward price-to-earnings ratio of less than 4.5 times earnings, based on this fiscal year’s analyst estimates, and a similar multiple of enterprise value/EBITDA (earnings before interest, taxes, depreciation and amortization). The enterprise value takes into account the net debt.
Given the valuation, I think investors can win if the company can only get rid of the negative parts of its business, such as VillageMD and unprofitable stores. In the meantime, if anyone can help change the reimbursement model, it should be Wentworth, given his PBM experience.
This isn’t an easy fix, and the company could very well cut its dividend again to save money, but it still has levers to help the stock price and put the company on better financial footing, including selling its non- pharmaceutical businesses or even Alliance Boots in the UK Therefore, I would consider the stock a speculative buy for investors who are okay with some short-term volatility.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.
5 Things to Know If You Buy Walgreens Today was originally published by The Motley Fool
