***Disclaimers & Disclosures: This article is meant for discussion and entertainment purposes only. The following is not investment advice, nor a recommendation to buy or sell any security/investment. Investments always carry risk, so DYOR.
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Stocks included in this article: WBA, AAPL, MSFT, GS, CVS, RAD, WMT, TGT, UNH, CI, DG, JNJ, PG, AMZN, BRK/A, BRK/B.
We are long WBA.
Walgreens ($WBA) is a safe and cheap stock, selling at a discount, with an improving underlying business, and ripe for a buyout. In addition to a healthy 4% dividend, Walgreens is also a major potential takeover target in the healthcare/pharmaceutical space. Selling at attractive valuations, and as both a Dow component and a best-of-breed player in the pharmacy business, we think Walgreens represents a huge investment opportunity. Furthermore, with cheap valuations, a low Beta, and lower correlation to the broader market, we believe WBA is a top defensive play & income producer, and could be added as a core position to anyone’s portfolio. Including WBA in your portfolio is highly likely to reduce overall portfolio volatility and risk, and improve your performance.
Our price target for $WBA is $74, an upside of approximately 50%.
Below are the 6 main reasons we’re bullish on WBA.
1) WBA is a Dow component.
Walgreens stock ($WBA) is a Dow component. As one of only 30 stocks in the Dow Jones Industrial Average (the oldest and most historically-followed U.S. market index dating back to the late 1800s), WBA is now considered one of the select large-cap companies which (together) accurately represent the overall market.
Though WBA has a small weighting in the Dow (only ~1% when compared to 3% for Apple (AAPL), 5% for Microsoft (MSFT), and 7% for Goldman Sachs (GS), for example), it still stands to benefit greatly from being one of the most visible and widely-followed stocks as part of the Dow index. Moreover, with $Billions (or Trillions) of Dollars in passive investing, a lot of money flows to index funds. As index funds are bought, money is then invested into WBA, which pushes the price up.
WBA has A LOT of room to go. Its stock price can increase and earn a higher weighting, which could then trigger a “virtuous cycle”, where the stock price increases –> WBA weighting increases –> more passive (and active) money flows into WBA –> the stock price increases –> the positive cycle repeats.
In short, as a (relatively new) part of the Dow, WBA stock stands to gain. As it benefits from passive/index investing, its market cap can be $Billions larger. The honor of being one of the few companies in the Dow will keep WBA stock visible to investors and will keep the stock supported in a big way.
2) Best-of-Breed in Pharmacy/Healthcare
Walgreens is clearly one o f the largest players and best-of-breed companies in the Pharmacy/Healthcare space. Not only is WBA’s inclusion in the Dow a huge statement that WBA is best-of-breed, but also the lack of competition and alternative choices in pharmacy stocks is a huge advantage to WBA. With only CVS ($CVS) and Rite-aid ($RAD) as similar peers in the entire market (and with worse financials!), WBA is a clear #1 investment choice.
3) 4% Dividend
A 4% dividend makes WBA an income investment opportunity, in addition to the growth and stock price increases we expect to see in the near future. Not only is WBA a relatively safe stock with a low Beta (lower volatility than the broader market), but also the excellent 4% dividend payment is already half of the stock market’s yearly average return (8%) going back 100+ years.
Its further possible that WBA’s dividend can continue to grow sustainably; in fact, WBA is a blue-chip dividend powerhouse and officially a member of the “Dividend Aristocrats”, companies which have increased their dividend for 25+ consecutive years. Walgreens has increased its dividend for 45 years and running.
4) Attractive Valuations
WBA has very attractive valuations, and the stock is selling at a major discount. Investors have a chance right now to buy the stock and a great company at a bargain, right before the stock price could rise by 50%+.
Why is the stock so cheap? The company has shown poor stock performance over the past few years mostly due to poor earnings performance, low profitability, and high debt. Fortunately, things are improving and the stock hasn’t yet reflected the good news. It will soon be priced in, and the stock price will rise.
How do we know it’s cheap? Why is the stock a “buy”? WBA stock sells at attractive low multiples (1) on an absolute basis (10x forward P/E, 2x P/B, 9x P/FCF), (2) on an historical basis (lowest P/S and near 15-year low P/B and P/FCF), and (3) on a peer comparables basis (WBA is selling at significantly cheaper valuation multiples than Walmart (WMT), Johnson & Johnson (JNJ), Procter & Gamble (PG), Target (TGT), Dollar General (DG), United Health (UNH), Cigna (CI), etc.).
In other words, the stock is cheap on nearly all fronts, and potentially offering a major value investment. If WBA had multiples more comparable to its peer group, the stock would be trading at a significantly higher price. As market participants come to realize this market mispricing/inefficiency, the stock price is likely to adjust higher.
5) Improving Business
Walgreens’ business and future prospects seem to be improving. With a new CEO at the helm (the first African American female CEO of a Fortune 500 company), along with critical strategic decisions/initiatives likely upcoming, WBA is very well-positioned to grow and gain market share.
With most locations (physical stores) in very good condition still looking new, located on prime real estate, and acting as top places to get vaccinated against Covid-19, there is plenty more time in WBA’s bullish cycle. (see: https://www.netleaseadvisor.com/tenant/walgreens/ )
We will look at the upcoming year’s revenue, income, and cash flows to judge WBA’s progress and performance.
6) Takeover Target / Buyout
The cherry on top for Walgreens ($WBA) stock is a takeover.
Walgreens is an attractive takeover target. Especially in the retail/pharmaceutical/healthcare space, Walgreens presents a market-moving opportunity for a large public company or private equity group. In fact, this was attempted not too long ago when in late-2019 KKR ($KKR) showed interest in taking WBA private in the largest private-equity buyout of all-time (see: https://www.theguardian.com/business/2019/nov/11/walgreens-boots-alliance-kkr-buyout-offer ). The takeover offer at the time was $70-80/share, 40-60% higher than current prices.
There is clearly significant interest in WBA, and it’s been quiet for a little while. The sleeping lion (or bull?) could wake up at any moment.
A takeover has been attempted at much higher prices by private equity buyers. The existence of such investor interest and possible takeover offers provides (1) a strong catalyst for a soaring stock price, and (2) a floor to the stock, which will support the stock at or above current prices. If the stock price drops too far, buyers are highly likely to step in.
Additionally, though maybe unlikely, both Amazon ($AMZN) and Warren Buffett / Berkshire Hathaway ($BRK/A)($BRK/B) could be potential buyers. Amazon has shown much interest in expanding into Pharma/Drugs/Prescriptions as well as expanding its retail operation. WBA seems to be a great potential fit; and at only $50-100B, WBA is not such a big purchase for the $2 Trillion market cap Amazon.
Warren Buffett and/or Berkshire Hathaway could also be a potential investor. WBA fits many of the criteria which Buffett and other value investors look for. Additionally, Buffett and a joint venture between Amazon, Berkshire, and JP Morgan (called “Haven”) showed strong interest in disrupting the healthcare sector until recently disbanding (see: https://www.cnbc.com/2021/01/04/haven-the-amazon-berkshire-jpmorgan-venture-to-disrupt-healthcare-is-disbanding-after-3-years.html ).
It seems painfully clear that Amazon ($AMZN), Berkshire ($BRK/A)($BRK/B), and other major players are highly-interested in gaining a foothold in the space which Walgreens ($WBA) already dominates. If takeover interest materializes, or if Buffett decides to invest more heavily in WBA, you can bet there will be a lot of attention on the stock, and the stock price is likely to be much higher.