Taking Advantage of Aging Nation

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The number of Americans ages 65 and older will double over the next 40 years, reaching 80 million in 2040. 

One sector that should benefit from an aging population is the retail pharmacy business.

The largest player in the space is Walgreens Boots Alliance (WBA). 

Despite CVS (CVS) garnering more news for its merger with Aetna, Walgreens stock consistently garners more searches by both retail and financial pros when looking for pharmacy related stocks.

That’s a bit unusual considering CVS’s market cap is $122 billion compared to Walgreen’s paltry $36.8 billion.

But as you’ll read below, we think it’s because they see more value.

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Walgreens Business

Walgreens Boots Alliance (WBA) is the first global pharmacy-led health and wellness enterprise. 

The company’s portfolio includes Walgreens in the U.S. and Boots in Europe and Asia. In addition, it owns Duane Reade in the U.S., a Manhattan drug store chain, Benavides in Mexico, and Ahumada in Chile. Furthermore, it has several beauty brands, including No7, Soap & Glory, Liz Earle, Botanics, Sleek MakeUp, and YourGoodSkin. 

There are over 8,965 retail stores under the Walgreens and Duane Reade brands in the U.S. as of 8/31/21 and 4,031 retail stores under the Boots, Benavides, and Ahumada internationally. 

In Q4 2021, WBA agreed to invest $5.2 billion in VillageMD, a Chicago firm that operates primary care clinics and telehealth services. VillageMD also provides a health-tech platform to independent providers. 

WBA’s stake in VillageMD is north of 63%. And as of Q2 2022, 102 VillageMD co-located clinics are now open, on track toward 200+ by the end of CY22. 

WBA is also making strides to boost its online presence. Digital sales in the U.S. showed a +38% in 2Q (116% on a 2-year basis), with 3.9 million same-day pickup orders.  

Financials

The obvious concern investors will have with WBA is the company’s debt which sits at $38.56 billion versus $1.89 billion in cash on hand and a market cap of $36.8 billion. 

However, WBA has consistently maintained a strong and positive free cash flow position. 

Revenues have remained steady, and so has the firm’s gross margin. 

The company grew revenues (YoY) by 8.8%, below the sector median of 11.26%. Over the last 5-years, WBA has seen its revenues grow an average of 6.32%

While the company has heavy debt, the firm paid shareholders a $1.52 annual dividend in 2017. Today the dividend is $1.90, an increase of 25% from 2017.  

Plus, the firm has doubled its free cash flow over the last decade. 

Its cash from operations is north of $5 billion, significantly better than the sector median of $401 million. 

Valuation

From a valuation perspective, WBA is cheap. The company has a P/E GAAP (TTM) of 6.23x, significantly less than the sector median of 21.07x, and its competitor, CVS, which is 15.62x.

Its price-to-sales ratio is 0.27x, well below the sector median of 1.24x. 

WBA is a price-to-cash-flow ratio of 7.10x, trouncing the sector median of 14.61x but comparable to CVS’s 6.5x.

If passive income is something that you find attractive in an investment, then you’ll be impressed with WBA’s dividend yield of 4.58%. 

Now, when it comes to profitability, no one does it better in its category than WBA. 

WBA has a better gross profit margin than RAD and CVS, as well as a higher return on equity and net income margin.   

WBA EBITDA growth (YoY) outshines CVS at 49.4% vs. 3.3%. And even its smaller competitor RAD, which is at -1.13%

Our Opinion – 8/10

While WBA is sitting on a mountain of debt, it’s one of those businesses too big to fail. The company administered 62 million vacations during the pandemic. And with the population aging rapidly, we see demand for WBA only picking up. 

From a valuation perspective, shares are cheap. And the company has been making strides to grow its business through VillageMD and Shields Health Solutions. 

We believe this business is a buy at these levels. And a long-term hold for many years to come.