Walgreens Boots Alliance WBA reached a new 52-week low after the company released news of the departure of CEO and board member Rosalind Brewer on Sept. 1, 2023. Here’s Morningstar’s take on what to think of Walgreens’ stock:
Key Morningstar Stats for Walgreens Boots Alliance
- Fair Value Estimate: $36.00
- Morningstar Rating: 5 stars
- Morningstar Economic Moat Rating: None
- Morningstar Uncertainty Rating: Medium
What We Think of Walgreens’ Stock After CEO’s Exit
Walgreens announced on Sept. 1 the departure of CEO and board member Rosalind Brewer, effective August 31.
We increased Walgreens’ uncertainty rating to High from Medium given many questions on the healthcare segment and leadership concerns. While top-line expansion for U.S. healthcare has been promising, growth in profitability has been sluggish. And with Brewer’s departure, we remain cautious about the segment until we get a clearer picture of how the company views and acts on the business’s future.
Walgreens’ board members—as well as the market—were not happy with the slow pace at which Walgreens grew its U.S. healthcare business. We think they were expecting a faster ramp-up in the segment’s profitability given the company spent over $10 billion over the last two years on mergers and acquisitions to grow this business.
The U.S. healthcare business expands Walgreens’ offering through caregivers like VillageMD, a provider of value-based primary-care services, and Summit Health, a provider of primary, specialty, and urgent care, as well as additional services for hospitals to create an omnichannel experience for patients.
Fair Value Estimate for Walgreens
With its 5-star rating, we believe Walgreens’ stock is undervalued compared with our long-term fair value estimate.
After reviewing our key valuation assumptions, we lowered our fair value estimate to $36 per share from $40. Against a difficult backdrop of weak coronavirus services sales, price-sensitive customers, and weaker-than-expected U.S. healthcare segment margin growth, we dialed back on top-line growth assumptions and slowed our forecast profitability expansion for the U.S. healthcare business.
The company’s U.S. retail pharmacy business, which made up over 82% of overall sales in fiscal 2022, generates roughly three fourths of its sales from the sale of prescription drugs and the rest from retail sales. In the near term, we expect a slight decline in the top line for its pharmacy division and a low-single-digit increase in sales for retail. In 2021, Walgreens benefited from COVID-19 vaccinations and testing but saw reduced sales for both in 2022, and we expect this trend to continue into 2023. For retail, we expect a low-single-digit top-line increase driven by increased sales of its branded products and materialization of the myWalgreens credit card program, offset by store closures (management expects to close 450-500 stores by fiscal 2024). Over the long term, we expect mid-single-digit top-line growth for pharmacy sales and low-single-digit growth for retail. We believe pharmacy sales will be driven by growing prescription volume and increasing average sales per prescription, driven by an aging population, increased utilization of specialty drugs, biosimilar launches, and branded drug price inflation. We expect retail sales to continue to be fueled by Walgreens-branded products and general merchandise sales growth as well as managing shrink levels, slightly offset by continued store closures.
Economic Moat Rating
We assign Walgreens a no-moat rating because we do not believe the company possesses any structural advantages strong enough to earn excess returns and generate returns on invested capital above its cost of capital over the next 10 years.
Risk and Uncertainty
We raise our Uncertainty Rating for Walgreens to High from Medium, which reflects our quantitative analysis of the firm based on the return ranges used by our star rating system, concerns around U.S. healthcare growth, and pressures from pharmacy benefit managers and macroeconomic conditions.
PBMs play a critical role in contracting reimbursement rates for pharmacies. We have seen the largest three PBMs—CVS Caremark CVS, Express Scripts, and OptumRx—control more of the market year over year. In 2015, the three controlled roughly two thirds of the market but that number jumped to over 80% in 2022. As the consolidation of PBMs continues, the significance of the three players in the overall drug supply chain strengthens, giving them more pricing power. Pharmacies in the U.S. have been facing growing pressure from PBMs and dealing with the ensuing margin headwinds. We expect the reimbursement pressure from PBMs to persist and continue to squeeze margins for Walgreens. Beyond this, we expect other macro healthcare trends, such as an increasing number of patients switching from 30-day to 90-day prescriptions and growing adoption of specialty drugs, to compress Walgreens’ margins.
WBA Bulls Say
- Walgreens is one of the largest domestic retail pharmacy chains, with around 8,800 U.S. locations. Over three fourths of Americans live within five miles of a Walgreens location.
- By acquiring primary, urgent, and special care businesses as well as post-acute care services, Walgreens is making its offerings more comprehensive and positioning itself to tap into more of a patient’s health journey.
- Adding services like Village Medical and Health Corner to a Walgreens location brings more people into the store and creates synergies.
WBA Bears Say
- The confluence of reimbursement pricing pressure in the retail pharmacy and tough general retail store conditions has diminished profitability and ROICs.
- As more mail-order pharmacies enter the market and patients get their medications delivered, there will be less traffic in Walgreens stores, acting as a headwind for its retail business.
- Walgreens could struggle to incorporate its new U.S. healthcare business and fail to fully materialize the synergies between its U.S. healthcare and retail pharmacy businesses.
This article was compiled by Monit Khandwala.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.