Shares of Walgreens Boots Alliance (WBA 0.57%) fell hard recently after management disappointed investors by missing Wall Street's earnings expectations for its fiscal third quarter ended May 31.
Walgreens stock tanked in response to its latest earnings call, but it wasn't all bad news. The company was able to report total revenue that grew 8% year over year driven by a rapidly growing U.S. healthcare business.
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Shares of Walgreens tanked roughly 10% following its latest earnings call, and the stock is down around 25% since the beginning of the year. Is it a bargain at these prices, or should investors avoid the stock for now?
Let's look at the reasons this stock tanked recently to see if it can shine for long-term investors.
Why Walgreens stock fell
Wall Street hates surprises to the downside, but that's what Walgreens delivered in its fiscal Q3 earnings report. The average investment bank analyst who follows the company was expecting adjusted earnings to reach $1.07 per share, but the company reported just $1.00 per share.
In March, Walgreens assured investors that adjusted earnings were on track to land in a range between $4.55 and $4.65 per share during its fiscal year that ends on August 31. At least half a dozen analysts lowered their price targets on the stock last week because management lowered its earnings-per-share (EPS) guidance down to a range between $4.00 and $4.05 this year.
Walgreens earned an adjusted $5.04 per share in fiscal 2022, so investors are looking at an earnings decline of about 20% year over year if it hits the high end of its new guided range.
Reasons to buy Walgreens
Walgreens had 8,727 retail pharmacy locations at the end of May, making it second only to CVS Health (CVS -0.22%), which had a little over 9,000 stores at the end of March. In 2021, the company spent $5.2 billion to raise its stake in VillageMD from 30% to 63% with the intention of creating hundreds of primary care practices located in existing pharmacy locations.
This January, VillageMD agreed to spend $9 billion on Summit Health, the parent company of CityMD, a provider of primary, specialty, and urgent care. Now, VillageMD operates more than 680 locations. Cigna, a U.S. health insurance benefits manager that collects monthly premiums from about 4.8 million members, has a minority stake in VillageMD.
With help from Cigna, U.S. healthcare sales more than tripled year over year to $2.0 billion during Walgreen's fiscal Q3.
By the numbers, Walgreens stock looks relatively inexpensive. It's currently trading at around 8.2 times trailing earnings. At this low multiple, long-term investors could receive market-beating gains even if earnings stagnate.
Reason to remain cautious
Walgreens isn't collecting insurance premiums for any of the patients it sends to the healthcare providers it acquired. Unfortunately, the lack of synergy is showing up on its income statements as deep losses.
U.S. healthcare sales are soaring, but none of that revenue is reaching Walgreens' bottom line yet. In fact, the new operating segment that investors are relying on to drive earnings growth lost a frightening $522 million in fiscal Q3.
The U.S. retail pharmacy segment grew sales by a single-digit percentage in fiscal Q3. Unfortunately, operating income from this segment was a measly $400 million during the period.
What could have been
In 2018, CVS Health took vertical integration seriously and coughed up $78 billion to acquire Aetna, a health insurance benefits manager that collects premiums from around 37 million members. Providing the benefits it's also paid to manage has pushed profits through the roof for CVS Health. Since acquiring Aetna, annualized cash from operations at CVS Health has more than tripled.
WBA Cash from Operations (TTM) data by YCharts.
Sadly, Wallgreens' less costly attempts to vertically integrate into America's convoluted healthcare system haven't worked out as well as CVS Health's. In fact, operating cash flow has declined more than 80% since 2018.
Walgreens is posting adjusted earnings, but according to generally accepted accounting principles (GAAP), it's lost $3.3 billion over the past 12 months. During its fiscal Q3 earnings call, Walgreens tried to soothe investor concerns by highlighting a cost-saving plan that could allow the company to approach profitability again. Without a health insurance benefits management business of its own, though, I'll be surprised if profits don't continue their long decline.
It's probably best to steer clear of this falling knife until we see proof that it can provide healthcare benefits without losing heaps of money.
