Making Your Portfolio Recession-Proof: Walgreens Boots Alliance (NASDAQ:WBA)

When studying articles and evaluation about Walgreens Boots Alliance, Inc. (NASDAQ:WBA) it looks as if a number of traders are seeing the inventory as a price entice proper now. And when wanting on the efficiency of the previous couple of years, it’s exhausting to argue in any other case. Whereas competitor CVS Well being (CVS) might lastly break the downtrend, which lasted for a number of years and moved larger in the previous couple of quarters, Walgreens Boots Alliance remains to be near multi-year lows.

However Mr. Market is seldom proper, and particularly nice long-term shopping for alternatives are created when a strong elementary enterprise meets pessimistic sentiment. And in my view, Walgreens Boots Alliance is an instance for a enterprise that may carry out solidly within the years to return, however traders appear to be extraordinarily pessimistic. I’ve already been bullish in my final articles, and I stay bullish though previous efficiency would possibly point out in any other case. And proper now, I might additionally argue that Walgreens Boots Alliance is the proper funding for an upcoming recession. However let’s begin by wanting on the final quarterly outcomes.

Quarterly Outcomes

Final quarterly outcomes weren’t nice – and the inventory was punished straight away. Within the third quarter of fiscal 2022, Walgreens Boots Alliance reported gross sales of $32,597 million and in comparison with $34,030 million in gross sales in the identical quarter final 12 months it is a decline of 4.2% year-over-year. And never solely income declined year-over-year; whereas Walgreens Boots Alliance might report an working earnings of $1,134 million in the identical quarter final 12 months, it reported an working lack of $320 million this quarter. And at last, diluted earnings per share declined from $1.38 in Q3/21 to $0.33 in Q3/22 – a decline of 76.1% YoY.

When attempting to establish causes for declining income and earnings per share, we are able to discover a number of. Working earnings switched to an working loss, largely as a consequence of a $683 million cost associated to the opioid settlement with the State of Florida in addition to larger prices associated to the Transformational Price Administration Program. And the decrease COVID-19 vaccinations additionally had a unfavourable impact on the enterprise, as vaccinations had been extraordinarily excessive in the identical quarter final 12 months (nonetheless, this was to be anticipated).

And regardless of the relatively mediocre outcomes, Walgreens Boots Alliance is sustaining its full 12 months steerage and remains to be anticipating adjusted earnings per share to develop within the low single digits.

Exceeding Expectations

We should acknowledge that the sentiment round Walgreens Boots Alliance appears to be relatively unfavourable – that is mirrored by the inventory value, which is constant its downtrend, in addition to the extraordinarily low valuation multiples Walgreens Boots Alliance is buying and selling for (we’ll get to that).

However when taking a look at previous quarterly outcomes and analysts’ expectations, Walgreens Boots Alliance might beat expectations for income in addition to earnings per share eight quarters in a row. And it’s not untypical that firms exceed analysts’ expectations (most firms do), however it is a trace that analysts and traders would possibly underestimate Walgreens Boots Alliance.

Recession

Not solely would possibly analysts proceed to underestimate Walgreens Boots Alliance, however the firm (and inventory) may also be a very good choose for the subsequent potential recession. When wanting on the inventory efficiency in the previous couple of a long time, we are able to see that Walgreens Boots Alliance reacted to some recessions by declining about 50%, however we additionally see the inventory hardly reacting in any respect to another recessions.

And much more essential than the inventory value efficiency is the elemental efficiency throughout a recession. The inventory would possibly react in excessive methods, though it’s not justified by the elemental enterprise. When taking a look at income in the previous couple of a long time, it’s exhausting to establish recessions. The declining income in the previous couple of years can’t actually be related to any recession, and in earlier recessions, Walgreens Boots Alliance might maintain income a minimum of secure. Earnings per share reacted to recessions, however very reasonably.

And for the subsequent potential recession, we are able to assume that Walgreens Boots Alliance will carry out nicely once more. And contemplating that the inventory value already declined 60% from its earlier all-time excessive, I might see the draw back potential very restricted in case of a recession. Walgreens Boots Alliance is promoting prescribed drugs and healthcare merchandise, which stay important even in financial downturns. And most of its wellness merchandise may also be described as relatively important merchandise. All in all, Walgreens Boots Alliance needs to be thought of a really recession-proof enterprise.

Dividend

Walgreens Boots Alliance additionally raised the dividend once more. And whereas this may also be seen as a bullish argument, we additionally need to level out that the annual dividend was raised solely by one cent – a dividend enhance of solely 0.5%.

However, Walgreens Boots Alliance is fascinating for its dividend. Not solely has the corporate been a secure dividend payer, however the inventory has a tempting 4.8% dividend yield proper now. And such a excessive dividend yield needs to be fascinating in a monetary world the place yields are nonetheless relatively low. Walgreens Boots Alliance can be one of many dividend aristocrats and is on its approach to changing into one of many dividend kings in a number of years.

Acquisitions and Divestitures

When taking a look at Walgreens Boots Alliance proper now, we additionally should speak about divestitures and acquisitions (though a few of it would solely be rumors proper now). It isn’t a rumor that Walgreens Boots Alliance deserted the sale of its Boots drugstore chain on the finish of June. Walgreens Boots Alliance and the consortium between Reliance Industries Ltd. and Apollo World Administration Inc. couldn’t agree on the value for the UK drugstore chain. Whereas WBA was anticipating to attain about $6 billion from the sale, the consortium was clearly not prepared to pay that quantity.

And other than divestitures, Walgreens Boots Alliance can be affected by acquisitions. Amazon.com, Inc. (AMZN) agreed to accumulate One Medical (ONEM), and the information had a unfavourable impact on the share value of CVS in addition to WBA. This was particularly dangerous information for CVS Well being as the corporate was additionally serious about buying One Medical. And whereas I nonetheless do not assume that neither CVS nor WBA have to be afraid of Amazon, it’s displaying that Amazon is repeatedly transferring within the healthcare and pharmaceutical distribution sector.

Moreover, there was some hypothesis a couple of potential acquisition of Teladoc Well being, Inc. (TDOC) by CVS Well being or Walgreens Boots Alliance. And whereas Teladoc Well being might be a match for CVS or WBA, I do not know if an acquisition can be a wise transfer, as each firms ought to have the ability to duplicate the service for themselves as Teladoc should relatively be seen as a enterprise with out a moat.

Progress

And rising by acquisitions or strategic investments in different companies is definitely one approach to develop for Walgreens Boots Alliance. In my final article, I already talked about the investments in VillageMD in addition to Shields. Each are a part of the brand new Walgreens Well being development technique.

And Walgreens Boots Alliance has fairly bold targets for Walgreens Well being within the subsequent few years. Till 2027, the corporate is anticipating to have about 1,200 Walgreens Well being Corners in addition to 1,000 co-located Clinics with VillageMD. In complete, Walgreens Boots Alliance is anticipating $9-10 billion in gross sales from its Walgreens Well being phase.

Nonetheless, we should level out that Walgreens Well being will not be capable of meet its earlier gross sales targets. Throughout the Investor Day final 12 months, the corporate anticipated about $3 billion in gross sales in 2022, at first of the 12 months it was lowered to $2.6 billion and now WBA is anticipating solely $2 billion in gross sales.

However, the expansion numbers are nonetheless strong and gross sales in addition to areas are rising with a excessive tempo. Up to now, the corporate has opened 56 Well being Corners and is on monitor to achieve its calendar 12 months 2022 purpose of 100 Well being Corners. It additionally has 120 VillageMD co-located clinics and is on monitor to achieve 200 until the tip of the present calendar 12 months. Just lately, Walgreens Boots Alliance additionally introduced a strategic partnership with Buckeye Well being Plan – the third accomplice (both payor or supplier) and needs to achieve 5 until the tip of the 12 months. Professional forma gross sales development for VillageMD was 69% year-over-year, and Shields grew 47% year-over-year.

And Walgreens Boots Alliance sees an enormous addressable marketplace for VillageMD. In optimistic expectations, the corporate sees a complete addressable market of $3.3 trillion in 2025.

Intrinsic Worth Calculation

Whereas a number of others would possibly contemplate Walgreens Boots Alliance as a price entice – that’s deserving its low valuation a number of – I contemplate WBA as extraordinarily low-cost. By no means thoughts what the angle is – the info are apparent. And a truth is that WBA is buying and selling for a P/E ratio of 6.4, which is extraordinarily near the bottom P/E ratio of the final ten years and an absurdly low valuation a number of for a strong (rising) enterprise.

And as a substitute of calculating an intrinsic worth as soon as once more, we are able to take a look at my calculation in January 2022 because the numbers are nonetheless correct. In my final article, I wrote:

As an alternative of wanting on the easy valuation metrics, we are able to additionally use a reduction money stream calculation to find out an intrinsic worth for Walgreens Boots Alliance. As foundation for our calculation, we are able to use the free money stream of the final 4 quarters, which was $4,057 million. When assuming that Walgreens Boots Alliance will not be capable of develop in any respect, the intrinsic worth for Walgreens Boots Alliance would nonetheless be $46.76 (assuming a ten% low cost charge and 867.6 million excellent shares). When assuming a modest development charge of solely 3% for the years to return, the intrinsic worth would enhance to $66.80, and Walgreens Boots Alliance would already be undervalued.

However we are able to make a number of arguments, that an intrinsic worth of $66.80 remains to be not correct for Walgreens Boots Alliance. First, when wanting on the common free money stream of the final 5 years, it was a lot larger than the free money stream of the final 4 quarters. And when utilizing that quantity ($4,995 million) as foundation as a substitute and assume as soon as once more 3% development until perpetuity, we get an intrinsic worth of $82.25 for Walgreens Boots Alliance.

When wanting on the development assumptions and administration’s long-term steerage from above, we nonetheless should state that these assumptions are too cautious. An assumption of solely 3% development until perpetuity can be too cautious when taking a look at previous development charges of Walgreens Boots Alliance. When calculating with the assumptions from Walgreens Boots Alliance long-term development algorithm (0% development in 2022, about 4% development in 2023 and about 7% development in 2024 and 11% development from 2025 going ahead) we get an intrinsic worth of $136.78 for the inventory. And I nonetheless used the decrease free money stream of the final 4 quarters and naturally solely 6% development until perpetuity beginning a decade from now (as I all the time do).”

Conclusion

In my view, Walgreens Boots Alliance is a strong enterprise, which must also have the ability to develop with a strong tempo within the years to return. Moreover, we’re speaking a couple of enterprise that’s recession-proof – a facet that is likely to be extraordinarily essential within the subsequent few years. And whereas others would possibly argue Walgreens Boots Alliance is a price entice that’s deserving a low-to-mid single-digit valuation a number of, I contemplate the inventory a fantastic funding at this level.