What goes down can come up. Several analysts making just such a prediction for Walgreens Boots Alliance (WBA +0.00%).
Shares of the pharmaceutical services leader have fallen close to 17% so far this year while the S&P 500 has risen nearly 8%. Walgreens could be poised to rebound, though. Wall Street expects the stock to skyrocket by 30%. But is that realistic?
NASDAQ: WBA
Key Data Points
Great expectations
Of the 24 analysts surveyed by Refinitiv in May, five rated Walgreens as a "strong buy" with another 10 analysts recommending buying the stock. Although nine analysts rated Walgreens as a "hold," there wasn't a single sell recommendation among the group.
This general optimism is reflected in the 12-month price targets for the healthcare stock, too. As previously mentioned, the average analysts' target is 30% higher than Walgreens' current share price. The most aggressive price target represents an upside potential of around 74%. Even the most pessimistic on Wall Street about Walgreens think that the stock should move higher in the not-too-distant future.
Why do analysts like Walgreens right now? Deutsche Bank predicts that consumer demand will increase globally as COVID-19 concerns wane. Loop Capital thinks that Walgreens will be able to hold its own against major rivals CVS Health and Rite Aid.
There's also Walgreens' valuation to consider. The stock currently trades at only around 6.6 times forward earnings.
Great challenges, too
While many on Wall Street have great expectations for Walgreens, the pharmaceutical services company faces some great challenges, too. Those challenges were easily observed in the company's fiscal 2023 second-quarter results announced two months ago.
Walgreens' earnings per share (EPS) fell by 20% year over year based on generally accepted accounting principles (GAAP). Its non-GAAP adjusted EPS plummeted even more with a 27% decline.
Some analysts think that the tapering off of COVID-19 will provide a boost to Walgreens. However, the company's lower earnings in fiscal Q2 were largely due to lower COVID-19 vaccine and testing volumes.
Walgreens' high dividend yield of nearly 6.2% and track record of 47 consecutive years of dividend increases could even be in jeopardy. Raymond James analysts wrote to clients last week that Walgreens' dividend "is only just supported by recurring FCF [free cash flow] at a 1.2 coverage ratio." Although Walgreens is selling some real estate and AmerisourceBergen and Option Care Health shares, the analysts believe that "absent these monetizable and finite assets, the open-ended dividend would likely be unsustainable long term."
Optimistic, but not that optimistic
I'm not as worried about Walgreens' dividend as Raymond James analysts seem to be. My view is that the company's management team will do whatever it takes to ensure that the dividends continue to grow.
I also think that some of the fundamentals for Walgreens's business are improving. The company should be in a position to deliver stronger growth in the second half of 2023 thanks to less reimbursement pressure in the U.S. and more favorable prior-year comparisons.
However, I'm not so confident that Walgreens stock will be able to skyrocket by 30% over the next 12 months. My chief concern is that the U.S. could enter a mild recession, as many economists (including those at the Federal Reserve) expect.
Walgreens' business is more resilient during economic downturns than a lot of other companies. But even a mild recession would likely cause some pain.
Over the long run, I expect that Walgreens stock will indeed rebound nicely. Whether or not that strong bounce comes as quickly as Wall Street expects is a different story.
