It's been an ugly past year for Walgreens Boots Alliance (WBA -0.26%) stock, which is down over 45% in that span. It's been a tough decade, in fact, with the stock plunging over 75% over the past 10 years.
With the stock now trading where it was in 1998, let's look what has gone wrong for the company and whether investors should consider picking up shares in the stock at these levels.
Company struggles
One of the biggest issues facing Walgreens, and the pharmacy industry in general, has been constant reimbursement pressure. The company has consistently talked about this issue since at least the start of 2016.
Within the prescription drug industry, pharmacies get reimbursed by pharmacy benefit management companies (PBMs) whose job it is to negotiate prices for their health insurance provider customers. The three big PBMs now control about 80% of the market and have been pushing down reimbursement rates.
The pressure has hit the entire industry, from big pharmacies, such as Walgreens, to smaller independents. In a National Community Pharmacists Association survey, nearly a third of independent pharmacies said they were considering closing their doors this year due to reimbursement pressures. Meanwhile, Rite Aid filed for bankruptcy last fall.
For its part, Walgreens has tried to expand beyond the pharmacy business to counteract the reimbursement pressure it has been seeing. However, this led to a poor acquisition on its part, as former CEO Rosalind Brewer set out to create a more integrated company that would treat patients throughout their care continuum.
Walgreens' big mistake was buying a large stake in VillageMD, which itself was acquiring various medical groups to expand. However, expanding beyond its core markets proved difficult for ViilageMD, and last year the company decided to exit a number of newer markets. During its most recent quarter, Walgreens took a $5.8 billion after-tax goodwill write-down of its VillageMD investment in an admission that it greatly overpaid for the business.
For a company with $8.8 billion in net debt, not including operating leases, an ill-advised investment was not a good use of cash. The company is now looking to preserve cash and had to cut its dividend nearly in half back in January.
Image source: Getty Images.
Can the business be turned around?
When it comes to reimbursement, ultimately there is only so much blood from a stone that PBMs can squeeze out of pharmacies. The new CEO, Tim Wentworth, comes from the PMB business, where he was previously the CEO of Express Scripts. He is looking to shift reimbursements to a cost-plus model, where the company can benefit when it is able to help slow the inflationary pressures on drug prices on its end. It already uses this type of model in the U.K. with Boots, where pharmacists are able to advise patients and prescribe treatments for seven common health conditions.
However, the company warned that while PBMs have been open to this type of model, it will take time for the industry to shift toward it.
On the VillageMD and other healthcare side of the business, the damage has been done with the investment not working out as planned. The write-down is non-cash, so it is more of an admission of its mistake than anything else, and shows the likelihood that the business will not grow as expected. Instead, the company is working to restructure VillageMD's cost structure and shrink its footprint to improve profitability.
For the quarter, the company's U.S. Healthcare segment was able to flip to positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $17 million and a modest adjusted operating loss of $34 million. At the same time, VillageMD sales were up 20% as it saw same-clinic growth. So, there are, at the very least, signs that the segment will no longer be a drag on the company's results.
Time to buy the stock or stay away?
At a forward price-to-earnings (P/E) ratio of about 5 and enterprise value (EV)-to-EBITDA ratio of 5, Walgreens stock is inexpensive. The latter metric takes into account its net debt and takes out non-cash items.
WBA EV to EBITDA (Forward) data by YCharts
The path to recovery for the business is possible, but it's not going to happen overnight, and it's not guaranteed. The company carries a lot of debt, but it also has assets it can look to sell to reduce debt if it needs to in the future. U.K. pharmacy Boots is one option, as it has performed well with retail market share growth for 12 straight quarters.
At this point, Walgreens stock is an option to consider for patient investors with a tolerance for risk.
