With Shares Below 60%, Is Now the Time to Buy This Health Stock?

It has been a difficult year for Walgreens Boots Alliance (NASDAQ: WBA)the stock has fallen by nearly 60% in the past 12 months. The question for investors is whether this is a good buying opportunity or if there are more problems ahead.

Let’s take a closer look at why Walgreens stock is struggling and what the company can do to turn itself around.

Refund pressures and poor access

One of the biggest issues facing Walgreens is the drug reimbursement prices the company receives from pharmacy benefit managers (PBMs), which are organizations hired to keep health care costs down. down. PBMs act as brokers between drug companies, health insurers, and pharmacies to help obtain discounts and rebates for drug companies and set prices that insurance companies charge. pay pharmacies.

PBMs, on the other hand, are paid through an administrative fee as well as by taking some of the rebates from the pharmaceutical companies and spreading the difference between the price the insurer pays and the pharmacy pays. . However, apparently, the three largest PBMs are now owned by insurance companies.

Over the past decade, PBMs have put significant pricing pressure on pharmacies, including Walgreens. This has led to a significant decline over the years. For example, Walgreens saw its gross profit margin go from 28.2% in its 2014 fiscal year to 19.5% in its last fiscal year, which ended in August 2023. This means that for sales that each one it makes, it makes a small profit, in this case about nine percent. weak points.

In addition to the reimbursement pressure, Walgreens also received less cash when it acquired a majority stake in VillageMD and helped the company expand with its purchase of Summit Medical. The owner of primary care medical clinics was unable to successfully expand beyond its core location and had an impact on Walgreens’ operating results. Walgreens recently disclosed that VillageMD had failed to secure a $2.25 billion secured loan that it had given the company.

How to organize a company

In a regulatory filing, Walgreens noted that it is evaluating its options regarding VillageMD, including a possible sale of the entire business. This would be the best option in my view. Although Walgreens would undoubtedly lose money on any sale, it will be increased by removing most of its share from this money-losing investment.

As for its core drug business, the company has begun closing unprofitable stores across the country. This is a good move for several reasons. First, it will reduce costs by having fewer stores and reducing revenue. Second, although it will lose some money, it will also save a lot of sales when customers move their business to other nearby places. This should help boost the sales of each store, as it handles a lot of traffic under a small cost structure.

The story continues

As time goes on, the company still needs to try to reduce the constant pressure of returns. On the other hand, Walgreens has been in talks with PMBs and payers to implement a drug pricing model where you pay based on the volume of services you provide. Ultimately the pressure on reimbursement will need to be reduced and new brands introduced because forcing pharmacies out of business will not help anyone in the long run.

Is it time to buy a dip?

From a quality standpoint, Walgreens is clearly on the clearance rack. It trades at 5 times earnings based on next year’s analyst estimates. Meanwhile, using the enterprise value to EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple to consider its debt, the stock is trading at just over 4 times.

It’s cheap any way you look at it. That said, change will take time. The company needs to divest VillageMD, which, if it can find a buyer, will help reduce its debt burden. Then it needs to improve its store position and convince PBMs to implement a better model than the one currently in use.

If it can do these things, the stock can have a lot of potential. If it cannot complete these actions, the stock can become a value trap.

With that in mind, I would take a position on Walgreens because I think the company should eventually see better days ahead. However, I would keep the level low based on the potential risks.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the products mentioned. The Motley Fool has a publicity strategy.

With Shares Below 60%, Is Now the Time to Buy This Health Stock? was originally published by The Motley Fool