WBA looks like it could be ready to break out

June 18, 2018

WBA looks like it could be ready to break out

If you pay attention to the Pharmacy segment of the Food & Staples industry, a lot of the attention over the last few months has focused on companies other than the stock I’m highlighting today. Amazon (AMZN) doesn’t work in this space, but after acquiring Whole Foods last year, the market loves to guess about their next vertical acquisition target. Rumors not long ago that they might start looking at ways to enter the pharmacy business sent a lot of investors running away from the established companies in this segment as quickly as possible. CVS Health Corporation (CVS) caught some buzz by announcing their intentions to acquire Aetna Inc. (AET), another example of vertical integration with some intriguing implications and opportunities for the future. And while Walgreens Boots Alliance Inc. (WBA) hasn’t been sitting idle, their acquisition of more than 1,600 Rite Aid (RAD) stores for about $3.6 billion in cash this spring didn’t really turn many heads. It’s a more traditional, consolidation-oriented transaction that I guess just doesn’t boast the sexy sheen that excites investors right now.

That’s actually too bad, because if you dive into WBA’s fundamental and technical profile, you see a stock that looks like it could be poised on the verge of a bullish long-term trend reversal. It’s true that none of the effects – including the $3.6 billion spent to acquire those RAD stores, or the increase in debt that will probably be a natural result from it – have yet to be seen in any financial disclosures, but the company is scheduled for its first quarterly earnings announcement since the purchase closed on June 28. Depending on what kind of information is provided, that report could act as a strong upside catalyst. Let’s dive into the details as they currently stand.

Fundamental and Value Profile

Walgreens Boots Alliance, Inc. is a holding company. The Company is a pharmacy-led health and wellbeing company. The Company operates through three segments: Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale. The Retail Pharmacy USA segment consists of the Walgreen Co. (Walgreens) business, which includes the operation of retail drugstores, care clinics and providing specialty pharmacy services. The Retail Pharmacy International segment consists primarily of the Alliance Boots pharmacy-led health and beauty stores, optical practices and related contract manufacturing operations. The Pharmaceutical Wholesale segment consists of the Alliance Boots pharmaceutical wholesaling and distribution businesses. The Company’s portfolio of retail and business brands includes Walgreens, Duane Reade, Boots and Alliance Healthcare, as well as global health and beauty product brands, including No7, Botanics, Liz Earle and Soap & Glory. WBA has a current market cap of $63.4 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings increased by more than 27%, while sales grew a little over 12%. It’s hard for a company to grow earnings faster than sales, and generally not sustainable over time. I do take the difference, however as a good sign that management is doing a good job of maximizing their business operations.
  • Free Cash Flow: WBA has solid free cash flow of a little over $6.3 billion over the last twelve months. This number has declined a bit from the first quarter of 2017, when it was a little over $7 billion, but is much higher over the last four years, when it hit a low in June of 2014 at around $2.5 billion. This number should drop again in the next quarter as a reflection of the RAD stores purchase, though exactly how much it will drop remains to be seen.
  • Debt to Equity: the company’s debt to equity ratio is .44, which is low and should generally be quite manageable. Long-term debt has also dropped by more 30% over the last two years, from around $19 billion to the levels reported in its last earnings report. This is another number that I expect will increase, but how much also remains to be seen.
  • Dividend: WBA pays an annual dividend of $1.60 per share, which translates to an annual yield of 2.5% at the stock’s current price.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for WBA is $28.42 per share. At the stock’s current price, that translates to a Price/Book Ratio of 2.25. This is inline with the industry average, which is 2.3, but below with the stock’s historical average of 2.9. A rally to par with the historical average would put the stock’s price above $82 per share – almost 30% above its current price. This really suggests the stock is legitimately undervalued right now.

Technical Profile

Here’s a look at the stock’s latest technical chart.

  • Current Price Action/Trends and Pivots: WBA’s downward trend started in September of last year, which marks the beginning point for the diagonal red line on the chart above. The downward trend has extended to the current date, with the stock finding consistent support around $62 in April, May, and earlier this month. It also appears to be dropping lower right now off of pivot high resistance around $65 per share. That range – $62 to $65 – has defined a pretty consistent trading range since April, and would mark the levels the stock would need to break to either extend the downward trend even lower or reverse the trend and begin to reclaim its previous highs.
  • Near-term Keys: The key for WBA is most likely to come from its June 28 earnings announcement, so investors would be wise to watch the stock’s price from that point forward. A break above $65 would probably offer a good short-term bump to at least $70 per share, with its January peak around $80 – which would be nearly at par with its historical Price/Book ratio – attainable as a longer-term target. If the stock breaks below $62, it could drop as low as $51 before finding new support, based on historical pivots below the the $62 range.

By Thomas Moore Consumer Staples Investiv Daily Retail Share: