Is Walgreens A Buy After Earnings Per Share Jump 8.7%?
Back in August 2020 I showed you 4 Reasons To Avoid Walgreens stock to protect your retirement portfolio.
Today, I give an update after it released its latest quarterly earnings and answer – Is Walgreens A Buy After Earnings Per Share Jump 8.7%?
You can read the full article above.
But if you don’t want to; here’s a quick recap of why I said to avoid it previously…
- 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 Walgreen’s stock.
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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 Walgreen’s 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 Walgreen’s 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.
I told you to avoid investing in Walgreens because it doesn’t meet the thresholds, I require for investment… And because CVS is a much better business that does meet these criteria.
This thesis continued to play out after it released its most up to date quarterly earnings on March 31st… Sort of.
- 2nd fiscal quarter sales rose 4.6% to $32.8 million.
- 2nd fiscal quarter earnings per share rose 8.7% to $1.06 per share.
- 2nd fiscal quarter cash from operations rose 2.9% to $2.6 billion.
- And new Rosalind Brewer started as CEO on March 15th to replace outgoing CEO Stefano Pessina.
This great news combined with prior upbeat earnings means Walgreen’s stock is up 39.4% since I told you to avoid it on August 18th, 2020.
So, was I wrong to tell you not to buy its stock then?
Walgreens didn’t meet any of the criteria I require from a potential investment.
Especially with all the uncertainty still then related to Covid.
And even though Walgreens results are improved… They’re still not good enough for what I require.
Plus, it’s even more overvalued now than it was in August…
Walgreens’ P/E is now 83.8.
Its P/CF is 8.9.
And its forward P/E is 11.7.
Its average valuation is 34.8 as of this writing.
CVS is still a far better business to buy for the long term.
Its debt levels are lower. Its profits are higher. Its faring better due to Covid. And it was cheaper when I first recommended it to you.
I want an enormous margin of safety for you because this eliminates risk AND gives you higher investment returns.
I don’t want you to have just one or the other of these things. I want you to have both.
Remain patient and wait to buy Walgreens… Or better yet, consider investing in CVS or any of our other buy recommendations below.
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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.