Walgreens Boots Alliance (WBA -0.97%) might be your preferred pharmacy, but that doesn't mean you have to preferentially buy its stock -- at least not without stopping to think about it first. As reliable as its prescription-filling services are, its cash flows aren't exactly rock solid anymore.
Still, where there's a business experiencing a recent decline, there's the opportunity to make money by correctly betting on a turnaround. With that in mind, let's consider what the bulls and the bears have to say about this stock.
Bears point to recent rocky times and question the probability of a turnaround
The bears see Walgreens as a business that's in decline, selling off its assets and scaling down its operations in an attempt to keep the lights on amid a cash crunch and a mountain of debt. There's a lot of evidence that the bear thesis is correct.
Its trailing 12-month (TTM) revenue only grew by 1% over the last five years, reaching more than $136 billion. This suggests its core pharmacy segment is struggling. Also, its plans to enter into providing primary care and specialty pharmacy services have yet to bear fruit. It may yet take a few more years for those newer segments to drive growth ... if they ever become profitable. With larger rivals like CVS Health doing the same while remaining consistently profitable, unlike Walgreens, it's also evident that the company has no competitive advantage in the markets it's entering as of yet.
Furthermore, its debt load now eclipses $37 billion, while its cash and equivalents total only $970 million. In its fiscal third quarter alone, it burned more than $545 million of its cash. That's part of the reason why it sold off some of its stake in AmerisourceBergen, not to mention its recent divestitures of Option Care Health, Farmacias Ahumada, and Guangzhou Pharmaceuticals. Businesses that make for good investments are rarely in the position of trying to liquidate their parts for cash.
Bulls are banking on a lot to change, and soon
The bull thesis for Walgreens stock is that via a combination of new leadership and an overall remodeling of the company's aims and capabilities, the bad times of the last few years will become a distant memory, and its bargain-bin valuation will mean that even relatively modest operational improvements could pay off significantly for shareholders.
The ongoing management shake-up will doubtlessly bring in a breath of fresh air for shareholders even if it doesn't guarantee the bulls are right. In mid-July, it appointed the CEO of Becton, Dickinson, a major healthcare and biopharma supply company, to the board of directors. Then at the end of July, its chief financial officer (CFO) departed and has yet to be replaced. To cap it off, its CEO resigned on Sept. 1.
Once those two executive seats are filled, the company may opt to alter its strategic plans, and that could be for the better. Deeper cuts to operations and further divestitures of non-core assets may well be necessary to remain liquid. That could be fine in the long term, as bulls are also banking on the market's rock-bottom expectations being relatively easy to outperform.
The stock's valuation is dirt cheap at the moment. Its price-to-sales (P/S) multiple is 0.1, and before its recent pair of unprofitable quarters, its price-to-earnings (P/E) ratio was 6. The new leaders won't need to implement many improvements to convince the market that the stock is worth a bit more per share, which would enable those multiples to expand and provide a tidy return to investors. For instance, merely accomplishing management's existing plan to slash expenses by $4.1 billion by its fiscal 2024 could be a start of the turnaround.
Who's right?
At the moment, the bears make a far more compelling case than the bulls. The company's inherently low-growth business model and considerable near-term headwinds make it risky, and the upside for those who invest now is limited. That means you probably should avoid buying this stock, even if you're a diehard bargain hunter or turnaround stock expert.
