Walgreens Boots Alliance Stock Hits 27-Year Lows. Has It Become a Steal of a Deal? | The Motley Fool (2024)

Buying a stock on weakness can be a dangerous idea. Imagine a stock that you think may be a decent buy falls to a new 52-week low. Then a few weeks later, it hits a new low. Then another. And after a while of this tailspin, it's at a multiyear low. That's what many investors have been experiencing with Walgreens Boots Alliance (WBA -0.28%).

Shares of the pharmacy retailer are not just near their 52-week lows but they recently even hit 27-year lows. This kind of an extreme sell-off suggests that there are serious problems under the hood that make the stock too risky of an option for many investors to consider. Let's take a look at just how risky Walgreens is, and whether it's a good contrarian buy right now, or if it is nothing more than a value trap at this point.

Profitability is the biggest concern for Walgreens

Walgreens has a lot of fires to put out. The business isn't generating much growth, it's facing a lot of competition from Walmart and Amazon, and it probably doesn't help that rival Rite Aid filed for bankruptcy last year. But if Walgreens improves its prospects for long-term profit growth, that can take care of what I think is its biggest issue. That's because if the company isn't generating strong margins, it won't be able to compete on price, it'll likely burn through cash, and it won't have nearly as many resources at its disposal to invest in its future growth.

Technically, Walgreens is profitable. In its most recent quarter (ended May 31), it reported earnings per share (EPS) of $0.40, which was actually better than a year ago, when it incurred impairment charges and EPS was just $0.14. But net earnings of $344 million were just 0.9% of the $36.4 billion that Walgreens reported in sales. Its margins need to be a whole lot better. Otherwise, there isn't much of a buffer there for the business to be more aggressive on price or to be able to absorb an increase in costs, such as those related to its investments into healthcare and the launch of primary care clinics.

Reducing its footprint could help

New CEO Tim Wentworth is looking at scaling down the business by closing down locations, particularly underperforming ones. Wentworth recently said, "Seventy-five percent of our stores drive 100% of our profitability today."

With a stat like that, the writing looks to be on the wall for Walgreens: It needs to cut down on the number of stores it has. Assessing which stores to keep and which to close down is a key part of the strategic review the company is undertaking. But with more than 8,000 stores, the task of shuttering potentially thousands of underperforming stores is bound to be a time-consuming process. However, in the long run, it can help Walgreens achieve a smaller footprint and incur less in administrative expenses, putting the company in a better position to achieve stronger margins.

Walgreens will benefit from a much leaner and more efficient operating model. But it isn't going to be an easy turnaround by any means, and it could take a while to know whether the company is indeed on the right track.

Is Walgreens a good contrarian buy or just a value trap?

Walgreens stock has plummeted 76% in three years. For the shares to reverse course, it won't be easy. If it does, however, then there's certainly the case to be made that there may be a lot of upside for the healthcare stock.

But even if you're a contrarian investor, this may simply be too risky of a stock to own. Walgreens has a lot going on right now, and what its business may look like in five or 10 years is anyone's guess. And with so much uncertainty, it's hard to put a value on what the company is really worth given all those unknowns and all the challenges it's facing today.

While it may appear to be cheap, Walgreens definitely looks like a value trap right now. It may seem like a bargain trading at just 6 times its trailing earnings. But what good is that number if the company's earnings deteriorate further in the years ahead, particularly as it invests heavily into healthcare and launches more primary care clinics?

Walgreens just isn't worth the risk. Investors are probably better off taking a wait-and-see approach with the stock. You may miss out on some potential gains if the turnaround goes well, but you could also avoid significant losses if it doesn't.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Walmart. The Motley Fool has a disclosure policy.

Walgreens Boots Alliance Stock Hits 27-Year Lows. Has It Become a Steal of a Deal? | The Motley Fool (2024)

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