Sometimes it can seem like a stock is a falling knife, where trying to slow its fall is just going to cut you. That's what Walgreens Boots Alliance (WBA -0.26%) investors may be feeling right now. The stock has dropped to levels it hasn't traded at since the 1990s, and it keeps falling lower. The price drop suggests that the market knows that Walgreens faces a tough road ahead.
Walgreens is working to regain the market's confidence. With a new CEO, there's some hope that things could get better for the business. All indications, though, suggest it will take a while before that happens. But how low could the stock go till then?
Are investors better off selling their shares in this struggling retailer, or is it a better move to simply hang on and wait at this point?
Where analysts see the stock going
Analysts take on the task of researching a stock in detail to give their clients (and sometimes the general public) an informed evaluation of how much (if any) potential there is for the stock to perform. When an analyst sets a price target, it typically covers a period of 12 months or so. Based on the consensus analyst price target of $23.57 as of June 10, Walgreens shares could rise by nearly 50% over the next 12 months from where they trade today.
But before you rush out and buy the stock based on that forecast, it's important to remember that analysts routinely update their price targets. And the last five analysts covering this stock who set price targets have lowered them. As that continues to happen, the consensus average will come down. What remains encouraging is that four of the past five targets are still higher than where the stock trades right now, so even despite the downgrades, analysts still believe the stock should be worth more in the near term.
What does Walgreens' valuation say about the stock?
While analyst price targets can be helpful when gauging a stock's potential, it's always important to do an independent evaluation. This can be done by looking at earnings and book multiples. Currently, Walgreens trades at just 5 times its estimated future earnings and right around its book value.
That seems cheap, but let's consider a bit more context. For one thing, Walgreens has struggled with profitability. In each of the past four quarters, it incurred an operating loss. This has been a low-margin business and that isn't likely to change, especially as it focuses on launching health clinics -- a venture that even low-cost leader Walmart doesn't appear to think is worth the effort. While opening health clinics may present Walgreens with a new growth opportunity, it may not necessarily be a hugely profitable one.
Based on earnings, Walgreens looks like a potential value trap because future profitability is by no means a guarantee, despite the company's efforts to cut costs. Although it's trading near its book value, investors would be right to demand a discount for the healthcare stock given the risk involved with the business.
Walgreens stock may be cheap, but it's far from a no-brainer buy
Although it may not be easy, if you're still hanging on to Walgreens in your portfolio, now may be as good a time as any to cut your losses. Even under new management, there's no guarantee that it will be in better shape in a year or two. The company's core business is still pharmacy retail, which isn't highly profitable to begin with, and it's not made any easier with competitors like Walmart and Amazon to contend with.
I wouldn't be surprised if Walgreens stock were to continue to fall lower in the months ahead and potentially dip below a $10 billion market cap. It's tempting to think that perhaps this time, with the stock down 40% year to date, it has finally bottomed out, but that's a risky assumption to make.
Even if you are bullish on Walgreens stock at this price point, the safer option would be to sell now and keep an eye on the company to see if its turnaround plan is successful. You might miss out on some gains if it ends up going in the right direction, but you could also avoid further losses in case things don't go according to plan.
