Walgreens Boots Alliance Inc (WBA) has seen its stock beaten down in recent months, with Walgreens stock down 14% from its high.
However, it does not matter whether WBA is trading at all-time highs right now, when you do proper analysis, it is clear that Walgreens stock presents a terrific investment opportunity.
As a result, the fact that shares of Walgreens are down 14% from its high is the first reason that investors should buy WBA. In addition, let’s look at four significant reasons why Walgreens stock is a great buy right.
Four Other Reasons WBA Is a Buy
By the time its next fiscal year ends in August 2017, WBA will have nearly $125 billion in revenue. That’s an increase of more than 60% over a two-year span, reflecting both organic growth and the inclusion of its acquired international retail pharmacy business (Boots) and its wholesale unit (Alliance).
However, with shareholders already approving the deal, and reports that the FTC is nearing an approval, Walgreens will also have Rite Aid Corporation (RAD). Even if the FTC requires WBA to part ways with 1,000 stores and $3 billion in annual revenue from Rite Aid, Walgreens will still be adding a $30 billion business, and will top $150 billion in revenue.
Hence, this is amazing growth, and growth is deserving of a big multiple.
WBA is not valued like a $150 billion company
If we look back at 2014 and 2015, Walgreens stock traded at a multiple of at least 0.85 for just about the entire 24 months. Often times, it would surpass 1.0x trailing 12-month sales.
With more than $150 billion in annual revenue once RAD is acquired, WBA stock trades at less than 0.60 times future sales. Clearly, that is too cheap based on its growth and its recent valuation history.
Walgreens gets very diversified
A few years ago WBA was known exclusively as a U.S. retail pharmacy, the largest of its kind. Nowadays, it is a diversified company in all things related to healthcare and drug distribution.
Yes, WBA’s U.S. operations are still enormous, responsible for 70% of total revenue. This includes pharmacy sales, 45% of total revenue, and retail operations, 25%. Then, it has the international retail pharmacy that accounts for slightly more than 10% of total revenue and its wholesale that is responsible for nearly 20%.
While there may not be much upside in Walgreens’ U.S. and wholesale businesses, it is important to note that all of WBA’s business aside from retail are growing on a comparable basis. That’s impressive! Furthermore, international markets present a great long-term growth opportunity for Walgreens to both acquire and build new stores in select regions.
When you consider these facts coupled with the fact that Rite Aid also achieves comparable growth and will provide WBA with a new pharmacy benefit management segment, it is clear that there is a lot to like, even after it hits that inevitable $150 billion in annual revenue mark.
PBM brings about great opportunities
When WBA acquires RAD it will also gain EnvisionRX, a pharmacy benefit management asset. This could do wonders for WBA long-term.
EnvisionRX has grown to revenue of $5 billion from just $1.7 billion in 2011. It also has more than 21 million members nationwide.
What’s happening in the pharmacy space is drug companies are partnering with large benefit managers like Caremark or Express Scripts to obtain exclusivity and in exchange, the pharmacy benefit manager gets a cheaper price for the drug(s). WBA will have a bigger bargaining tool once it acquires Rite Aid, with EnvisionRX.
While EnvisionRX is nowhere near the size of its two larger peers, the backing of Walgreens’ large retail pharmacy presence will make it a priority among drug companies. This creates a unique opportunity for WBA to drastically grow EnvisionRX well beyond $5 billion in annual revenue and land some nice drug pricing/exclusivity deals with drug companies that should boost margins.
In my opinion, EnvisionRX is the real gem in WBA’s acquisition of Rite Aid, and long-term it could have a profound effect on Walgreens stock.
As of this writing, Brian Nichols owns WBA stock.