Walgreens stock (NASDAQ:WBA) gained momentum following renewed speculation about a potential acquisition by private equity firm Sycamore Partners. Sycamore specializes in consumer, distribution, and retail-related investments. Reports of discussions between the two counterparts first surfaced last December. CNBC’s David Faber recently stated that the potential deal was “showing signs of life”.
Walgreens shares have struggled significantly, declining 54% since the beginning of 2024 compared to the S&P 500’s 28% gain. The downward pressure stems from deteriorating profits and intensifying market competition. While WBA has disappointed investors recently, those seeking growth with lower volatility than single-stock exposure might consider the High-Quality portfolio, which has delivered superior returns to the S&P 500, generating over 91% gains since its launch.
Even if we look at a slightly longer time frame, WBA has been an underperformer, down 66% since early 2023 – falling from levels of $32 then to around $11 now – vs. an increase of 60% for the S&P 500 over this period. This can primarily be attributed to:
- a 46% decline in its earnings per share from $5.04 in 2022 to $2.73 now; and
- a 37% fall in the company’s trailing P/E ratio from 6.4x to 4.1x over the same period
Falling profitability has weighed on Walgreens’ earnings
Walgreens’ revenues have risen from $133 billion in 2022 to $150 billion in the latest twelve-month period, primarily fueled by drug price increases and higher prescription volumes. While its German wholesale division has boosted international performance, the retail segment has struggled, with sales dropping 6% between 2022 and 2024 (fiscal year ending August). The shift to online shopping has reduced store traffic, compounded by challenges from inflation and high interest rates. In response, Walgreens plans to shutter 1,000 locations by 2027 as part of its “Footprint Optimization Program” to enhance profitability.
Walgreens’ profitability has deteriorated significantly, with its reported operating margin falling from 0.7% in 2022 to -1.2% currently. The adjusted operating margin has also declined sharply, dropping from 3.4% in 2022 to 1.6% over the past twelve months. These margin pressures, driven by reimbursement challenges, rising brand drug costs, and product mix changes, have taken a toll on earnings, which have plunged from $5.04 per share in 2022 to $2.73 currently.
Profitability concerns have rattled investors
The market has responded to Walgreens’ earnings decline by significantly reducing its valuation multiple, which has dropped from 6.4x trailing earnings in 2022 to 4.1x currently. The stock price has experienced a dramatic decline, falling from $32 in early 2023 to $9 by late 2024, before slightly recovering to $11. The stock’s path has been marked by extreme volatility compared to the S&P 500, with wild swings in annual returns: +36% in 2021, -25% in both 2022 and 2023, and a steep -61% in 2024.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has comfortably outperformed the S&P 500 over the last four-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment around rate cuts and ongoing trade wars, could WBA face a similar situation as it did in 2022, 2023 and 2024 and underperform the S&P over the next 12 months – or will it see a recovery?
From a valuation perspective, WBA stock looks attractive at levels of $11. The stock is currently trading at 4.1x trailing earnings – below its last four-year average P/E ratio of 5.9x, pricing in the profitability concerns and continued decline in earnings in the near term. However, with the company’s commitment to improving its margins, we believe the stock has potential for growth. Our Walgreens’ Valuation of $14 reflects this positive outlook. Furthermore, any development around sale of Walgreens’ businesses to Sycamore Partners would be positive for WBA stock.
Although WBA stock appears to have room for growth, it’s worth comparing how Walgreens’ peers perform on key metrics. You can also explore valuable company comparisons across industries at Peer Comparisons.
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