Walgreens Boots Alliance Inc. (WBA, Financial) is a leading pharmacy retailer in the U.S. that has benefited from the rollout of Covid-19 vaccinations. The company recently started providing vaccines to patients in the U.K. and has seen a visible increase in Ebitda margins over the past few quarters. It has vaccinated over 25 million people through its pharmacies, driving top-line growth.
After the sale of its Alliance Healthcare business to AmerisourceBergen Corp. (ABC, Financial) for $6.5 billion earlier this year, Walgreens’ management has been fully focused on optimizing its core pharmacy business and has been putting in strong efforts with respect to both the physical as well as digital transformation of its pharmacies to boost growth. Despite the recent runup resulting from the pandemic-related tailwinds, the company’s stock appears to be undervalued and could be a good long-term, blue-chip investment.
Recent financial performance
Walgreens managed to report an all-around beat for the recent quarter earlier this month. Its top line of $34.03 billion saw 12.07% growth as compared to the $30.36 billion in revenue recorded in the prior-year quarter. The company breezed past the analyst consensus estimate of $33.49 billion. This revenue translated into a gross margin of 21.02% and an operating margin of 3.19%, both of which were up from the year-ago quarter. The company's net income was $1.20 billion and its adjusted earnings per share of $1.51 were about 35 cents ahead of the average Wall Street expectations.
The highlight of the quarter was the strong free cash flow generation as the company reported $1.75 billion in operating cash flows and spent only $15 million on investing activities. Its free cash flow was higher as compared to the same period in 2020.
Optimization of pharmacies and new clinics
In order to stay competitive, Walgreens has been gradually working toward the transformation of both its physical and digital platforms and is implementing better cost management. Its pharmacy business is the highest-margin segment that contributes the maximum share of profits, so the company is looking to optimize it to derive the maximum possible growth. Management’s goal in this transformation is to make the business a one-stop neighborhood health destination as they believe this strategy will help boost overall traffic and margins.
It has also partnered with VillageMD to open approximately 80 clinics in Walgreens stores by the end of 2021. This should help the company stay competitive with rival CVS Health Corp. (CVS, Financial), benefit operating margins and significantly minimize the impact of competition from new entrants like Amazon.com Inc. (AMZN, Financial).
Digital transformation and other drivers
Corporations have understood the true importance of digitalization in the Covid era as a virtual necessity for survival. While Walgreen’s pharmacies fell under the "essential" category, it is also important to increase the stock price in this fast-paced world along with the physical transformation. To help the digital platform gain momentum, the company is ramping up its efforts in e-commerce through the expected launch of its credit and debit cards and the My Walgreens app.
In the previous quarter, the company saw its My Walgreens memberships increase from 56 million to 75 million, showing an impressive quarter-over-quarter growth of 34%. This significant growth indicates customers' latest adaptation to Walgreens's digital services, including its e-commerce solutions where the company is looking to build an edge over CVS. Management has planned to launch its credit and debit card by the end of this year to acquire more members from the digital platform and add fintech services to its business.
Final thoughts
As we can see in the above chart, the company has had a decent runup over the past year given the Covid-19-related tailwinds, but the interesting part is that its stock continues to look undervalued. The company is trading at an enterprise value-to-revenue multiple of 0.53 and a price-earnings ratio of 17.67 that is significantly below the median for the health care service providers industry. Its price-sales ratio is even lower at 0.27 and it the book value is 1.82.
Even the GF Value chart is showing the stock is undervalued.
As Walgreens’ balance sheet was flush with cash after the sale of Alliance Healthcare, the proceeds have been used to reduce leverage and finance new operational changes. The debt-to-equity ratio of 1.82 is still on the higher side, but this should not be too bothersome to investors. At the end of the day, one must remember that Walgreens is a fundamentally strong company with a stable business model. I believe its stock is valued cheaply and could be an interesting investment opportunity.
