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Walgreens Is Too Cheap to Be Ignored

January 03, 2019

Walgreen Boots Alliance (WBA) has over 13,000 pharmaceutical and retail stores in 11 countries, and remains one of the dominant pharmacies in the US and Britain. This is a good market segments to be in. Drug spending continues to be buoyant, with growth in the US alone on an annual upward march.

And while Britain has its challenges, with concerns over Brexit, US retail pharma sales make up 75% of the company’s revenues.

Sales overall for the company are up by 11.30% for the trailing year. And in a market where margins can get pretty thin, Walgreens maintains an operating margin that is running at an annual rate of 4.70%. This, in turn, is driving very impressive returns for the company. The return on shareholders’ equity is at 20.70% and the return on assets is running at 7.80%. The company also delivers a solid return on capital of 14.10%.

It does this with very modest leverage. Its cash continues to be ample with continuing flows from rising retail sales. And it has minimal debt, with a debt to assets sitting at only 21.10%.

Walgreens pays a nice dividend that continues to be above the average of the S&P 500 Index, at 2.60%. The current distribution is running at 44 cents a share and has been rising on average over the past five years by 7.32% a year.

All of these positives mean little to the market, though—the shares are valued at over a 50% discount to the trailing sales. And again, note that sales have been continuing to rise, making it even more of a bargain.

Price to book is at 2.50 times, which is modest in the current market. And that underlying book value continues to climb from recent lows in 2017, to a current $27.14 per share.

This is a bargain stock.

And management seems to notice this. Share buying by insiders was on a tear throughout 2018, with buys topping out at over $85 million into December of 2018.

But what’s holding back the outside stock buyers? First, the presence of Amazon (AMZN). This company, through its acquisition of an online pharmaceutical subscription company, is building its capabilities to reach consumers directly. And that is competition. But Walgreens is so ubiquitous in its availability and ease of delivery that it is more of a threat to Amazon’s developing market for now than Amazon is to its business.

Then there is the concern over the costs and efficiency of brick and mortar retail, which is also part of the Walgreen’s business. Again, Walgreens continues to provide an expansive localized outlet for convenience for consumers beyond just prescription drugs. And there is the move already underway by management to review every store location in its vast network for the greatest returns for shareholders.

For dividend income and a stock that is defensive in its market segment, Walgreens is a bargain buy at a discount to rising revenues right now in a challenging general stock market.