Walgreens Boots Alliance (NASDAQ:WBA) is a company in transition. Following the recent departure of its CEO and CFO over the past two months, investors are rightfully concerned about the way forward. After all, Walgreens' retail pharmacy model has been under pressure since the COVID bubble burst as its growth momentum normalized. Coupled with the need to improve the profitability trajectory of its healthcare segment, the challenges facing Walgreens are aplenty.
As such, it's not hard to envisage why the no-moat healthcare player has suffered at the hands of sellers rushing for the exit. Following the selloff over the past two months, WBA revisited levels last seen in early 2009, likely compelling investors to throw in the towel, as they saw more than 14 years of hard-earned gains (price-performance) dissipate in a "flash."
Despite the capitulation move, I have not gleaned any validated bullish reversal signals on WBA corroborating robust buying sentiments. In other words, while WBA has consolidated over the past two weeks above the $21 level, investors must remain cautious, allowing more time for the stock to settle down first.
I think it's clear that WBA is undoubtedly cheap relative to its healthcare peers. Seeking Alpha Quant rated WBA with a best-in-class "A" valuation grade, suggesting it's timely to assess whether WBA could be at peak pessimism.
However, its "D" earnings revisions grade suggests that management's execution has been subpar. As such, I believe it shouldn't have surprised investors that leadership change is necessary for WBA investors to reflect its "dirt cheap" potential and not fall into the "value trap" hypothesis.
Analysts' estimates on Walgreens suggest a much-improved FY24 (year ending August 2024) could be in store after its suffering in FY23. As a reminder, management's prelim FY24 outlook at its June 2023 quarterly earnings stressed that it anticipates "low- to mid-single-digit growth in adjusted operating income."
As such, Walgreens expects the post-COVID and consumer discretionary spending headwinds to normalize in the next fiscal year, suggesting FY23 could be the bottom of its operating performance.
Wall Street anticipates the company's adjusted EBIT to increase by 2.9% in FY24, aligning with the lower end of its guidance range. As such, I believe much pessimism has likely been priced into WBA's valuation, as reflected in its price action.
WBA has dropped into "no man's land" following its capitulation from its July highs ($31.3 level), down more than 30% to its recent September lows ($21.4 level).
I gleaned buyers returned last week, likely attempting to help WBA consolidate after a massive hammering. However, there isn't a clear buy signal for investors looking for a mean-reversion opportunity to capitalize on. Also, it's crucial to note that WBA is firmly in a medium-term downtrend, suggesting the momentum remains with the sellers at critical resistance zones until proven otherwise.
Is WBA Stock A Buy?
Notwithstanding its attractive valuation, investors are likely forced to confront the possibility of a value trap. However, Walgreens' adjusted EBIT could bottom out in FY23 before a growth inflection in the following fiscal year.
Despite that, with the departure of its previous leadership, near-term caution is expected, but I don't expect a significant deviation from its earlier guidance for now.
However, I urge investors to give WBA some time to prove itself, placing it firmly in the penalty box to assess for a subsequent mean reversion opportunity if buying sentiments improve further.
The perils of catching a "falling knife" are ominous for WBA until we can validate that selling exhaustion in WBA has been reached.
Rating: Hold.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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