We came across a bearish thesis on Walgreens Boots Alliance, Inc. (NASDAQ:WBA) on ValueInvestorsClub by quads1025. In this article, we will summarize the bears’ thesis on WBA. The company’s shares were trading at $10.28 when this thesis was published, vs. the closing price of $11.12 on Mar 20.
A well-stocked pharmacy shelf full of the company’s pharmaceuticals, nutraceuticals, over-the-counter medications, and health care products.
WBA is a healthcare, pharmacy, and retail company in the United States, Germany, the United Kingdom, and internationally. It has three segments: US Retail Pharmacy, International, and U.S. Healthcare. The US Retail Pharmacy segment accounts for 78% of revenue and 77% of consolidated EBIT.
Pressure on pharmacy reimbursement rates is putting pressure on WBA’s cash flows with the possibility of FCF turning negative. To add to it, 90% of the retail business is driven by high-margin generic drugs and the potential for growth in this segment is limited. With branded drugs being costlier, Pharmacy Benefits Managers (PBMs) has been reducing the margin for pharmacy companies like WBA so that the higher pricing does not impact customers. The overall product mix may offer a lower margin due to the growth in branded drugs.
WBA has debt worth $4.7 billion maturing in 2025-26. This debt has an average cost of 4% but with higher rates prevailing, the expected cost for new debt would be around 8%. This would translate into an additional interest expense of $190 million. Another potential risk is the lawsuit filed by DOJ that alleges WBA of disbursing millions of unlawful prescriptions. The penalty should be around $1-10 billion, with the upper range close to its market capitalization.
The company has suspended its quarterly dividend of $0.25. WBA has also looked at asset sales in its US Healthcare division to raise cash. Assets like VillageMD, Shields, and CareCentrix have been offered but there have not been any key developments in the past few months. These measures raise the alarm, pointing to expected lower cash flows from core operations.
Gross margins have reduced from 21.8% in 2022 to 18% in 2024. One can expect the margins to further reduce to 16% in 2027. WBA should earn approximately $2 billion in EBITDA by 2027. With an interest expense of $650 million, $1.1 billion in CAPEX and $400 million in fines that have already been levied, FCF is already negative. This does not factor in the $1-10 billion additional fine that WBA faces from possibly new settlements.
While we acknowledge the potential of WBA as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than WBA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
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