Walgreens Boots Alliance Inc (WBA, Financial) recently experienced a 3.21% gain, with a share price of $30.52. Despite this, the company reported a Loss Per Share of $3.84. The question that arises: Is Walgreens Boots Alliance a potential value trap? This article explores this question, delving into the company's financials, valuation, and future prospects. Read on for an insightful analysis.
Company Overview
Walgreens Boots Alliance is one of the largest retail pharmacy chains in the U.S., boasting over 8,500 locations. Almost three quarters of Americans live within five miles of a Walgreens store. The company generates approximately two thirds of its revenue from prescription drug sales, contributing to 20% of total prescription revenue in the U.S. Additionally, Walgreens also earns from retail products, European drug wholesale, and healthcare. With more locations incorporating services like Health Corner and Village Medical, Walgreens creates an omnichannel experience for patients, positioning itself as a comprehensive healthcare provider.
Understanding the GF Value
The GF Value is a unique measure of a stock's intrinsic value, calculated considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line represents the stock's ideal fair trading value. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
At its current price of $30.52 per share and a market cap of $26.3 billion, Walgreens Boots Alliance is significantly undervalued based on its price-to-GF-Value ratio. However, the stock's warning signs, which include a low Altman Z-score of 1.79, suggests that the stock may be a potential value trap.
Financial Strength
Examining the financial strength of a company is crucial before investing. Companies with poor financial strength pose a higher risk of permanent loss. The cash-to-debt ratio and interest coverage offer insight into a company's financial strength. Walgreens Boots Alliance has a cash-to-debt ratio of 0.03, worse than 93.37% of companies in the Healthcare Providers & Services industry, indicating poor financial strength.
Profitability and Growth
Investing in profitable companies carries less risk. Walgreens Boots Alliance has been profitable for 10 out of the past 10 years. However, with an operating margin of -5.53%, it performs worse than 68.1% of companies in the Healthcare Providers & Services industry. The 3-year average annual revenue growth of Walgreens Boots Alliance is 5.6%, ranking worse than 58.77% of companies in the industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) and the weighted average cost of capital (WACC) is another way to gauge its profitability. For the past 12 months, Walgreens Boots Alliance's ROIC is -6.08, and its WACC is 4.6, suggesting the company is not generating sufficient returns on its capital investments.
Is Walgreens Boots Alliance a Value Trap?
Despite showing signs of undervaluation, Walgreens Boots Alliance may be a potential value trap due to its poor financial strength, fair profitability, and below-average growth. The company's Altman Z-score, a measure of its financial health and bankruptcy risk, stands at 1.79, placing it in the distress zone. Ideally, an Altman Z-score above 2.99 signifies a safer financial position.
Conclusion
In conclusion, Walgreens Boots Alliance shows signs of being a potential value trap. The company's financial condition is poor due to its low Z-score. Its growth ranks below 66.92% of companies in the Healthcare Providers & Services industry. For more details about Walgreens Boots Alliance's financials, you can check its 30-Year Financials here.
To find high-quality companies that may deliver above-average returns, check out GuruFocus High Quality Low Capex Screener.
