This pharmacy operator hopes to spur its flagging earnings with CBD (cannabidiol) products as more states legalize cannabis. The stock trades at just 9.1 times the forecast earnings despite the sales potential of CBD and the company’s cost-cutting program.
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Walgreens Boots Alliance Inc., $54.42, symbol WBA on Nasdaq (Shares outstanding: 903.1 million; Market cap: $49.1 billion; www.walgreensbootsalliance.com), is one of the world’s largest operators of retail drugstores, with over 18,500 outlets in 11 countries. It also sells its goods online.
In addition, Walgreens owns 27% of AmerisourceBergen Corp. (New York symbol ABC), a leading wholesale distributor of drugs and health-care products to pharmacies, hospitals and clinics.
The company took its current form in 2014 when it purchased 45% of European pharmacy chain Alliance Boots GmbH for $6.7 billion in cash and stock. Walgreens later exercised its option to purchase the remaining 55% for $9.5 billion.
Switzerland-based Alliance Boots operates over 3,330 health and beauty stores and 625 optical centres. As well, its wholesale drug businesses supply medicines and a range of other health-care products.
In 2017, Walgreens acquired 1,932 Rite-Aid drugstores in the U.S. for $4.375 billion.
As a result of those purchases, the company’s revenue rose 72.2%, from $76.4 billion in 2014 to $131.5 billion in 2018 (fiscal years end August 31).
If you exclude costs to absorb those new operations and other unusual items, overall earnings jumped 113.9%, from $2.90 billion in 2014 to $5.99 billion in 2018. Due to more shares outstanding, earnings per share rose at a slower rate of 107.6%, from $2.90 to $6.02.
In its fiscal 2019 third quarter, ended May 31, 2019, the company’s sales rose 0.7%, to $34.6 billion from $34.3 billion a year earlier. If you disregard current rates, sales improved 2.9%.
Walgreens’ overall earnings in the quarter fell 12.1%, to $1.39 billion from $1.52 billion. The company repurchased $3.7 billion of its shares in the first nine months of fiscal 2019. Due to fewer shares outstanding, per-share earnings declined just 3.9%, to $1.47 from $1.53.
The earnings drop is mainly due to lower profits from selling prescription drugs, as generic drugs and government pressure continue to hurt selling prices.
The company ended the quarter with cash of $839 million. Its long-term debt was $12.1 billion, or a moderate 27% of its market cap.
Growth by acquisition adds risk. However, Walgreens’ purchases have helped it compete with other big drugstore chains (like CVS Health) and mass market retailers (like Walmart). As well, the company now plans to cut at least $1.5 billion from its annual costs by fiscal 2022, mostly by closing unprofitable stores and streamlining its distribution networks.
Walgreens also aims to spur its sales and earnings be selling skin creams, patches and sprays containing CBD in 1,500 stores in nine states: Oregon, Colorado, New Mexico, Kentucky, Tennessee, Vermont, South Carolina, Illinois and Indiana.
CBD, short for cannabidiol, is a non-psychoactive compound extracted from both marijuana and other cannabis varieties. In 2018, the U.S. Congress passed a new farm bill that makes it legal for hemp growers to extract CBD. However, the Food and Drug Administration (FDA) has so far banned companies from adding CBD to food or selling it as a dietary supplement.
Walgreens is in a strong position to profit as more U.S. states legalize cannabis. That’s because its pharmacy operations have experience distributing controlled substances and counselling customers about their effects.
The company expects its earnings for all of fiscal 2019 to be flat compared with 2018. That’s down from its earlier prediction of 7% to 12% growth.
Slowing earnings has caused the stock to drop 20% since the start of 2019. It now trades at 9.1 times this year’s forecast earnings of $5.98 a share.
Walgreens and similar chains are getting squeezed as they negotiate with pharmacy-benefit managers. PBMs, as they are called, serve insurers and other clients by choosing which medicines to cover and negotiating lower prices from both makers and sellers of drugs. While CVS owns one of the country’s biggest PBMs, Walgreens does not. That leaves it more exposed to pricing demands by PBMs.
While the prices that pharmacies like Walgreens pay for generic drugs have been falling, they have not kept pace with falling insurer reimbursement rates. That narrowing gap between the price Walgreens pays and the amount it receives after dispensing the drug is cutting the company’s profit margins.
Walgreens’ low price-to-earnings ratio also reflects concerns over Amazon.com’s plans to sell prescription drugs online. As well, the FDA has criticized the company for selling tobacco products to underage buyers. Additional violations could lead to fines or other penalties for Walgreens.
The company will raise its quarterly dividend by 4.0% with the September 2019 payment, to $0.4575 a share from $0.44. The new annual rate of $1.82 yields 3.4%.
Walgreens Boots Alliance is okay to hold, but only for patient investors.
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