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WBA Stock Dips 5% Post Fed Rate Cut: Should You Sell Walgreens Boots?
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Last week, investors strongly contemplated that the easing of inflation, followed by the Fed’s long-awaited aggressive 50-bps rate cut on Sept.18, will provide a respite from the prolonged drab scenario within the retail pharmacy sector. While they were not wrong with respect to other industry players, Walgreens Boots’ (WBA - Free Report) share price plunge, even amid the speculation of another half a percentage point cut in the rest of 2024, depicts a different story, denting investors’ enthusiasm.
Since the rate cut, the WBA stock lost more than 5% till yesterday’s close, underperforming the industry’s 0.8% decline, as well as the broader sector’s and the benchmark’s respective growth of 1.5% and 1.3%. Further, Walgreens Boot’s major competitors, like Herbalife (HLF - Free Report) and CVS Health (CVS - Free Report) , performed better, with a gain of 6.5% and a mere decline of 0.4%, respectively, during this period.
Share Price Performance With Respect to Peers Since Rate Cut
Image Source: Zacks Investment Research
WBA stock closed at $8.56 on Monday, quite near to its 52-week low of $8.46.
Not only this, WBA is currently trading below its 50-day and 100-day moving averages, indicating the possibility of a further bearish shift in the stock's price.
WBA Below 50 & 100 Day SMA
Image Source: Zacks Investment Research
The above scenario compels investors to think about whether the stock is simply a bad investment as of the current date. While the stock has been grappling with the industry-wide phenomenon of pharmacy reimbursement pressure, several issues within this pharmacy retail behemoth’s business for quite some time strongly justify why investors are losing confidence in the stock.
Let us delve deeper.
Prime Factors Pulling WBA Down
A Difficult Drug Retailing Scenario: Brand-name drugs that hold wide profit margins are protected with a reliable supply chain. However, low-margin generic drugs, which have a fragile supply-chain network, have been bearing the brunt of the ongoing economic slump. Drug retailers are also witnessing a constant rise in medicine prices stemming from the rising cost of raw materials. The industry players are currently grappling with continued pressure from non-reimbursable pharmacy expenses, which are significantly pulling down mass demand for prescription as well as over-the-counter drugs and vaccinations.
Walgreens Boots is severely affected by this ongoing crisis. In fact, despite the company reporting revenue expansion, the shrinking margins and earnings are pretty alarming. Pharmacy adjusted gross margin declined in the fiscal third quarter of 2024, impacted by unfavorable brand mix, reimbursement pressure reflecting last year's negotiations, disappearing COVID testing demand and incremental pressure from certain generic launches with procurement dynamics similar to brands. Pharmacy margins in the second half of fiscal 2024 are likely to be affected by impact from certain generic launches with procurement dynamics similar to brands, fluctuations in National Average Drug Acquisition Cost, inflation and unfavorable mix within branded drugs, and lower overall market growth.
U.S. Pharmacy Business Drabs: Walgreens Boots is currently facing significant challenges within the company’s U.S. Retail Pharmacy segment, stemming from an unfavorable consumer environment and adverse pharmacy industry trends. The company, in this regard, noted that customers have become increasingly selective and price-sensitive in their purchases. Despite several planned measures being taken, the company does not expect an immediate improvement within the U.S. retail business as the operating environment might continue to remain challenging.
Leveraged Balance Sheet: Walgreens Boots exited the third quarter of fiscal 2024 with cash and cash equivalents of $703 million, significantly lower than the total debt of $8.91 billion for the same period. The company’s solvency level is not at all good as the company does not even have sufficient cash for its short-term debt ($1.51 billion) repayment.
Unsustainably High Dividend: The current payout ratio stands at a very high level of 46.2% for the company. Amid the ongoing economic crisis, if inflationary cost pressures and supply chain disruptions continue to exacerbate, the company might find paying its regular quarterly dividends to be a burden. Meanwhile, Walgreens Boot’s five-year total shareholders' return (showing the combined return from share price changes and dividends) is currently at an alarming level of -79.5% (Finbox data).
Any Silver Lining?
Although the company is currently facing major business challenges, Walgreens Boots is successfully continuing with its cost-cutting initiatives and is confident about achieving $ 1 billion in cost savings in 2024. The company is currently putting an all-out effort to reform its pharmacy model by aggressively liquefying its unprofitable stores and businesses. In this regard, the company’s CEO, Tim Wentworth, recently noted that management is finalizing a multifactor store footprint optimization program, which will include the closure of a significant portion of these underperforming stores over the next three years.
This apart, the company is also working on plans to exit the VillageMD business to focus more on core growth.
If these plans get properly executed, Walgreens Boots, while streamlining its business, can also strategically reduce its debt level.
WBA Shares Are Cheap
In terms of valuation, too, WBA’s forward 12-month price-to-sales (P/E) is 0.05X, a discount to the industry's average of 0.14X. This suggests that investors may be paying a lower price relative to the company's expected sales growth.
Image Source: Zacks Investment Research
Wait for a Better Entry Point
As we have already discussed, WBA stock is currently positioned below its moving averages, which indicates potential negative movement. Further, looking at the company’s near-term outlook, the company’s ongoing business hiccups might not get fully resolved at any time in the rest of 2024. Accordingly, despite the recent significant dip in share prices, this might not be the ideal time to invest in WBA. Those who already own this Zacks Rank #4 (Sell) stock may even consider getting rid of the shares for the time being and wait till the company's financial stability starts to offer potential pathways to recovery.
Image: Bigstock
WBA Stock Dips 5% Post Fed Rate Cut: Should You Sell Walgreens Boots?
Last week, investors strongly contemplated that the easing of inflation, followed by the Fed’s long-awaited aggressive 50-bps rate cut on Sept.18, will provide a respite from the prolonged drab scenario within the retail pharmacy sector. While they were not wrong with respect to other industry players, Walgreens Boots’ (WBA - Free Report) share price plunge, even amid the speculation of another half a percentage point cut in the rest of 2024, depicts a different story, denting investors’ enthusiasm.
Since the rate cut, the WBA stock lost more than 5% till yesterday’s close, underperforming the industry’s 0.8% decline, as well as the broader sector’s and the benchmark’s respective growth of 1.5% and 1.3%. Further, Walgreens Boot’s major competitors, like Herbalife (HLF - Free Report) and CVS Health (CVS - Free Report) , performed better, with a gain of 6.5% and a mere decline of 0.4%, respectively, during this period.
Share Price Performance With Respect to Peers Since Rate Cut
Image Source: Zacks Investment Research
WBA stock closed at $8.56 on Monday, quite near to its 52-week low of $8.46.
Not only this, WBA is currently trading below its 50-day and 100-day moving averages, indicating the possibility of a further bearish shift in the stock's price.
WBA Below 50 & 100 Day SMA
Image Source: Zacks Investment Research
The above scenario compels investors to think about whether the stock is simply a bad investment as of the current date. While the stock has been grappling with the industry-wide phenomenon of pharmacy reimbursement pressure, several issues within this pharmacy retail behemoth’s business for quite some time strongly justify why investors are losing confidence in the stock.
Let us delve deeper.
Prime Factors Pulling WBA Down
A Difficult Drug Retailing Scenario: Brand-name drugs that hold wide profit margins are protected with a reliable supply chain. However, low-margin generic drugs, which have a fragile supply-chain network, have been bearing the brunt of the ongoing economic slump. Drug retailers are also witnessing a constant rise in medicine prices stemming from the rising cost of raw materials. The industry players are currently grappling with continued pressure from non-reimbursable pharmacy expenses, which are significantly pulling down mass demand for prescription as well as over-the-counter drugs and vaccinations.
Walgreens Boots is severely affected by this ongoing crisis. In fact, despite the company reporting revenue expansion, the shrinking margins and earnings are pretty alarming. Pharmacy adjusted gross margin declined in the fiscal third quarter of 2024, impacted by unfavorable brand mix, reimbursement pressure reflecting last year's negotiations, disappearing COVID testing demand and incremental pressure from certain generic launches with procurement dynamics similar to brands. Pharmacy margins in the second half of fiscal 2024 are likely to be affected by impact from certain generic launches with procurement dynamics similar to brands, fluctuations in National Average Drug Acquisition Cost, inflation and unfavorable mix within branded drugs, and lower overall market growth.
U.S. Pharmacy Business Drabs: Walgreens Boots is currently facing significant challenges within the company’s U.S. Retail Pharmacy segment, stemming from an unfavorable consumer environment and adverse pharmacy industry trends. The company, in this regard, noted that customers have become increasingly selective and price-sensitive in their purchases. Despite several planned measures being taken, the company does not expect an immediate improvement within the U.S. retail business as the operating environment might continue to remain challenging.
Leveraged Balance Sheet: Walgreens Boots exited the third quarter of fiscal 2024 with cash and cash equivalents of $703 million, significantly lower than the total debt of $8.91 billion for the same period. The company’s solvency level is not at all good as the company does not even have sufficient cash for its short-term debt ($1.51 billion) repayment.
Unsustainably High Dividend: The current payout ratio stands at a very high level of 46.2% for the company. Amid the ongoing economic crisis, if inflationary cost pressures and supply chain disruptions continue to exacerbate, the company might find paying its regular quarterly dividends to be a burden. Meanwhile, Walgreens Boot’s five-year total shareholders' return (showing the combined return from share price changes and dividends) is currently at an alarming level of -79.5% (Finbox data).
Any Silver Lining?
Although the company is currently facing major business challenges, Walgreens Boots is successfully continuing with its cost-cutting initiatives and is confident about achieving $ 1 billion in cost savings in 2024. The company is currently putting an all-out effort to reform its pharmacy model by aggressively liquefying its unprofitable stores and businesses. In this regard, the company’s CEO, Tim Wentworth, recently noted that management is finalizing a multifactor store footprint optimization program, which will include the closure of a significant portion of these underperforming stores over the next three years.
This apart, the company is also working on plans to exit the VillageMD business to focus more on core growth.
If these plans get properly executed, Walgreens Boots, while streamlining its business, can also strategically reduce its debt level.
WBA Shares Are Cheap
In terms of valuation, too, WBA’s forward 12-month price-to-sales (P/E) is 0.05X, a discount to the industry's average of 0.14X. This suggests that investors may be paying a lower price relative to the company's expected sales growth.
Image Source: Zacks Investment Research
Wait for a Better Entry Point
As we have already discussed, WBA stock is currently positioned below its moving averages, which indicates potential negative movement. Further, looking at the company’s near-term outlook, the company’s ongoing business hiccups might not get fully resolved at any time in the rest of 2024. Accordingly, despite the recent significant dip in share prices, this might not be the ideal time to invest in WBA. Those who already own this Zacks Rank #4 (Sell) stock may even consider getting rid of the shares for the time being and wait till the company's financial stability starts to offer potential pathways to recovery.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.