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Will Walgreens (WBA) Go Bankrupt? |
America was once a land of mom and pop pharmacies. Then, they consolidated under big chains like CVS (CVS) and Walgreens (WBA). Today, that business is in danger. CVS chose to acquire Aetna and become a holistic healthcare company. Rite Aid (RADCQ) filed for bankruptcy in late 2023. On paper, Walgreens looks like a steal. However, financial pros aren’t so sure. According, to our TrackStar data, money managers are spending time digging into Walgreens’ cash flows. The company is spending cash than it generates each year, putin the dividend in danger. So, we want to know…can they survive? Walgreens’ Business One of America’s largest pharmacy chains, Walgreens operates 8,631 stores, down from 8,817 stores last year. Each store contains a pharmacy as well as retail items including grocery, health, and beauty products. Revenues are segmented as follows:
Strategically, Walgreens Boots is committed to four priorities:
This focus has led to Walgreens taking a 63% stake in VillageMD, a primary care clinic chain. In 2022, VillageMD acquired Summit Health as a means to gain a greater foothold in the primary, speciality, and urgent care markets. While that’s helped Walgreens grow its sales, lower reimbursement rates and slowndown in generic introduction has crimped the company’s margins. Ultimately, 2024 is going to be a make or break year for the company. Financials
Source: Stock Analysis Although revenues continue to grow, marginshave been on a steady decline. The company’s cost management program is expected to save $4.1 billion in 2024, with $1B in cost savings already underway, there have been no signs of this happening yet. According to management, the ‘trends’ in the retail market and lower reimbursement rates are to blame. However, leadership knows they need to improve cash flows. Their plans to reduce Capex by $600M and working capital by $500M this year certainly go a long way towards that end. There also hasn’t been discussion about reducing the debt, which sits at a massive $34 billion. With operating cash flows barely above $1 billion last year, this is a massive problem. Valuation
Source: Seeking Alpha People point to 4.7% dividend yield and call Walgreens ‘cheap.’ In reality, it trades at a reasonable to expensive earnings and cash multiple. CVS is experiencing similar margin pressures, but has been able to reduce its expenses. And it trades at lower multiples. So, which would you rather own? Growth
Source: Seeking Alpha We find a similar story here, where CVS has seen better growth compared to Walgreens, on sales and earnings. CVS simply puts up better numbers overall than Walgreens. Profitability
Source: Seeking Alpha Now, Walgreens does have better gross margins. But it can’t seem to translate that to better EBIT. That’s why its returns on equity, assets, and total capital are abysmal for WBA. Our Opinion 2/10 In our opinion, Walgreens simply has too many problems to overcome. If they can start generating the $5-$8 billion in operating cash flow they did between 2018-2021 then we’d change our minds. But the headwinds don’t appear to be abating anytime soon. And the debt load is massive. We’d steer clear until the company starts to put together a plan that includes cutting the dividend and paying down the debt. |
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