Deep value, with ascending trajectory

Walgreens Boots Alliance NASDAQ: WBA the efforts are bearing fruit, although there is still work to be done. The company’s drive for efficiency and efforts to reinvigorate growth, sustain growth and improve profitability will increase shareholder value in the long term. The question today is how far the stock price can go, and that question is probably not far off.

The stock is trading above a critical support level that coincides with the lower end of the analyst’s range, suggesting a bottom is in place. Since the company is growing and on track to return to GAAP profitability, the 6X P/E valuation and 4.75% yield are more than attractive at this technical level.

Walgreens Has Solid 2ns Quarter, Tightens Guidance

Walgreens reported a solid quarter, with strength across all segments driving revenue growth of 6.3%. Revenue of $37.05 million beat the Marketbeat.com consensus by 340 basis points, led by strength in the U.S. healthcare sector. The U.S. healthcare industry has grown more than 33% annually and is rapidly approaching profitability. The international sector grew 6.6% and the U.S. retail pharmaceutical sector grew 4.6%.

Margin news is mixed. GAAP margin contracted significantly due to a non-cash write-down, leaving a loss close to $6 billion. The non-cash impairment was due to a reduction in the valuation of VillageMD’s goodwill, which had minimal impact on the underlying business. Adjusted margin contracted but fell short of expectations, leaving net income up 3% and adjusted earnings at 3.4%, which beat consensus by 4,600 basis points.

Given the company’s strengths in the second quarter, the forecast is a negative, but could be conservative. The company narrowed its earnings range by lowering its top line due to weak U.S. retail sales and lower sale-leaseback activity. However, the midpoint remains above analyst consensus, consistent with the idea that there is a floor in the market for this healthcare stock.

Walgreens’ dividend is safe for 2024

Walgreens’ cash flow and free cash flow turned negative in the second quarter, raising fears of another dividend cut, but it’s premature to assume it’s coming. The cash burn is primarily due to legal issues that are not expected to recur; if it had been corrected for this, the FCF would have been positive. The bottom line on the balance sheet is a reduction of $142 million or 16.5% in cash and securities, leaving the balance solid at $715 million.

As for the dividend, Walgreens cut the payment at the end of fiscal 2023, but can sustain the $1.00 payment this year, with the health of the dividend expected to improve by the end of the year. The payout is worth about 4.75%, with the shares trading at rock bottom, and is equal to 30% of this year’s earnings forecast and 28% thereafter.

Institutions are buying Walgreens at long-term lows

Institutional activity at Walgreens has been brisk in recent quarters, with both sales and purchases gaining traction. However, the bottom line is bullish, with buyers outpacing sellers for four consecutive quarters. This activity coincides with the bottom of the price action; if overall it continues to be bullish, that will help lift the market over time.

Analyst revisions recently reduced Walgreens sentiment to Reduce, but it may have bottomed. The latest price target revisions are lower, but most are above the low and approaching the consensus, which is 20% above the price action. A change in sentiment marked by upgrades or upward revisions to price targets would catalyze the market.

Walgreens technical stock is at rock bottom

Walgreens Boots Alliance shares bottomed in late 2023 and are testing the level again now. If the market confirms support at this level, WBA shares could rebound to $26 or higher. In such a scenario, the critical resistance would be near $26.80. Otherwise, the WBA may lose support in search of more solid support levels, but this is not expected.

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