Is Walgreens A Buy After Sales Rise 5.7%?
In the last few months, I’ve written two separate articles telling you to avoid Walgreens stock to protect your portfolio…
Today, I give an update and answer – Is Walgreens A Buy After Sales Rise 5.7%?
You can read the past articles in full using the links above.
But if you don’t want to; here’s a quick recap before we get to today’s update.
From Article #1 Linked Above
- It’s Got An Enormous Amount of Debt
As of the most recent quarter Walgreens (WBA) balance sheet is made up of 75.9% of total liabilities. And its debt-to-equity ratio is 1.64.
I want to invest in safe stocks that will be around for decades to come to help me build wealth over the long term. This helps insure I lose as little money as possible over time.
To put this into context, its largest competitor CVS Health (CVS) total balance sheet is 71.1% in total liabilities. And its debt-to-equity ratio is 1.21.
Meaning CVS is healthier when it comes to debt than Walgreens.
But there’s another reason to stay away from Walgreens stock.
2. It’s Not Producing Enough Profits and Cash Flow
In the most recent quarterly data Walgreens was unprofitable on a net income basis after losing $1.71 billion in the quarter.
This due in large part to negative effects and closures of its stores due to the coronavirus.
Its operating profitability margin in the trailing twelve months (TTM) is 0.9%.
Its net income profitability margin in the TTM period was negative 0.2%.
And its free cash flow to sales (FCF/Sales) margin in this same time was 3.1%%.
EDITOR’s NOTE – Trailing twelve months just means the last 12 months consecutively.
These compared to CVS on the same metrics…
Operating profit margin in the TTM period is 5.4%.
Net income profitability margin in the TTM period is negative 1.2%.
And its FCF/Sales margin in the same period is 5.2%.
Walgreens is only better than CVS on one of these important profitability metrics.
Generally, you want these numbers to be as high as possible on the positive side because that means the company is generating profits and cash flow from its operations.
These show that Walgreens is getting hurt more than its largest competitor CVS during this pandemic… Which gets us to reason #3 to avoid its stock.
3. Uncertainty Related To The Coronavirus
And Walgreens isn’t as prepared to handle this as CVS.
This was illustrated when Walgreens lost $1.71 billion in net income in the most recent quarter.
While CVS made $3 billion in net income in the same quarter.
Why the huge difference?
Largely due to Walgreens reliance on people coming into their stores… While CVS is branching out more to telehealth and prescription deliveries.
These 2 things are the main reasons one company did poorly – Walgreens. While the other did fantastically – CVS.
And this trend is likely to continue for both companies as well due to the still ongoing pandemic.
But what about valuation?
Which one is cheaper?
As of this writing Walgreens’ P/E is 49.3.
Its P/CF is 6.5.
And its forward P/E is 8.1.
Its average valuation is 21.3 as of this writing.
While CVS’ valuations are…
CVS’ P/E is 10.4.
Its P/CF is 5.4.
And its forward P/E is 9.3.
Its average valuation is 8.4 as of this writing.
On all three metrics I look to buy investments below 20 to consider them undervalued.
This shows that Walgreens is slightly overvalued… While its largest competitor is undervalued by a huge margin.
This means Walgreens stock does not offer you a margin of safety in investing terminology.
A margin of safety means you’re buying a safe investment… And this makes the investment riskier.
Not only this, but CVS is better on all major factors than its largest competitor Walgreens… And most of the time it’s not even close.
From Article #2 Linked Above
This thesis to avoid Walgreens continued playing out after it released its annual financial report on October 15th, 2020.
- Sales for the full year rose 2% to $139.5 billion.
This is impressive during the worst economic issues we’ve seen in almost 100 years.
But this is also where the good news ends…
- Operating income in the yearly period fell 73.7% to $1.3 billion.
- And earnings per share in the yearly period fell 88% to $0.52 per share.
Operating income and earnings per share fell so much largely due to the massive negative effects – and increased costs – associated with the coronavirus.
And with the coronavirus still raging here in the US – and now again in Europe and other parts of the world – there’s no end in sight to these problems.
In other words, Walgreens results got crushed in the last year… And it continues falling farther behind CVS during this pandemic.
Continue avoiding Walgreens.
And consider buying CVS for the reasons outlined in the following articles.
So far, the thesis to avoid Walgreens stock continued playing out after it released its most up to date quarterly earnings on January 7th, 2021.
The surface numbers were good…
Sales rose 5.7% in the year-to-year quarterly period to $36.3 billion.
And free cash flow grew 13% to $763 million in the year-to-year quarterly period.
These are both great of course and sent Walgreens shares up almost 16% in only two weeks so far in 2021.
But its also not the full story…
Much like in the latest Bed Bath & Beyond article from the other day, you need to dig deeper into the updated financials to see the true story.
Operating profits fell from positive $1 billion last year to negative $440 million and unprofitability this year.
Net profits fell from positive $845 million last year to negative $308 million and unprofitability this year.
And earnings per share fell from positive $0.95 per share last year to negative $0.36 per share and unprofitability this year.
What does this mean?
That in a real-world sense the coronavirus is still hurting Walgreens.
Most investors don’t look at investor presentations or financial docs in depth, so they don’t see these things. They just see that sales are up and assume things are good.
This why its stock is up almost 16% already this year.
For these reasons ignore the increase in its share price… Because when you dig into the numbers – they’re still not great… And CVS is still much better as you can find out in the articles on them either above or below.
Until then, use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above