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Stepan Lavrouk
Stepan Lavrouk
Articles (76) 

Time to Buy Walgreens?

An aging population means long-term business for the pharmacy sector

March 08, 2019 | About:

Walgreens Boots Alliance Inc. (NASDAQ:WBA) is a company with a history dating back more than 100 years, though the company itself was created in 2014 through a merger of Walgreens and Boots Alliance. With 415,000 employees and more than 9,500 locations in the U.S. alone, it is undoubtedly a giant in the pharmacy space. Recently, however, shares have taken a tumble, falling to below $60, a five-year low for the company. This begs the question: has the stock entered value territory, or are there reasons to be wary?

Is it worth it?

Walgreens is trading at 11.36 times earnings, 2.53 times book value and has averaged a return on equity of 14.3% over the last 15 years. It currently pays an annual dividend of $1.72 per share, which is good for a yield of 2.5%. During its most recent quarterly earnings call, management affirmed its guidance for growth in the 7% to 12% range. Despite its massive size, this is a company that is still growing at a healthy clip.

When it comes to fundamentals, there are a number of reasons to be bullish on Walgreens’ long-term prospects.

First, the aging population of the United States will continue to drive demand for health care and, in particular, for the convenient access to health care products large chain pharmacies can offer. The baby boomer population is aging into retirement, creating a huge market for the treatment of chronic conditions like arthritis.

Second, Walgreens is expanding its online presence. In order to tackle Amazon (NASDAQ:AMZN), which could become a major threat, the company needs to make it easier for customers to submit prescriptions online and to develop a strong home delivery service. CEO Stefano Pessina addressed this issue on the most recent earnings call:

“Digitalization of the company is a huge challenge for those significant opportunities. We are still developing our plans, but we will connect better with the consumer improved operations of our stores, simplify what we do today and our digital capabilities that will make us fit for the future and of course we are continuing to invest in our core IT system to improve core processes and operations”.

While this is a work in progress, the company has made significant steps toward embracing the digital trend, launching an online marketplace last year.

The Amazon threat is a major component of the Walgreens bear case, so it makes sense to examine it here. There are a few reasons why Amazon may not be the death of the traditional brick-and-mortar pharmacy.

First, the online giant is overcommitted in too many areas. It is attempting to expand into the food and beverage, pharmacy, cloud computing and electronics sectors, to name just a few. In these circumstances, there are only so many resources it can devote to each area. 

Second, the nature of health care provision requires physical locations in a way that retail does not. Yes, some people will opt to have their prescriptions filled online and delivered to their door. But far more will want to speak to a real person who can advise them on how to treat their illness. That is not something Amazon is able to do.

Summary

The demand for health care is only going to continue to grow in the developed world, and Walgreens Boots Alliance is well positioned to deliver. The path forward is not free of obstacles, but they can be overcome.

Disclosure: The author owns no stocks mentioned.

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About the author:

Stepan Lavrouk
Stepan Lavrouk is a financial writer with a background in equity research and macro trading. Specific investing interests include energy, fundamental geoeconomic analysis and biotechnology. He holds a bachelor of science degree from Trinity College Dublin.

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