With Shares Down Over 60%, Is Now the Time to Buy This Healthcare Stock? | The Motley Fool (2024)

It's been a difficult year for Walgreens Boots Alliance (WBA -0.86%), with the stock down about 60% during the past 12 months. The question for investors is whether this is a great buying opportunity or if there is more downside ahead.

Let's take a closer look at why Walgreens stock has struggled and what the company can do to turn itself around.

Reimbursement pressures and a poor acquisition

The single biggest issue facing Walgreens is drug reimbursement prices that the company receives from pharmacy benefit managers (PBMs), which are organizations hired to keep healthcare costs down. PBMs act as middlemen between drug companies, health insurers, and pharmacies to help get discounted pricing and rebates for drug companies and set the prices insurance companies pay to pharmacies.

PBMs, meanwhile, get paid via an administrative fee as well as through capturing some of the price rebate from pharmaceutical companies and the spread between the price an insurer pays and the pharmacy pays. Notably, though, the three largest PBMs are now all owned by insurance companies.

During the past decade, PBMs have put considerable pricing pressure on pharmacies, including Walgreens. This has led to a lot of margin narrowing over the years. For example, Walgreens saw its gross margin go from 28.2% in its fiscal year 2014 to 19.5% last fiscal year, which ended in August 2023. This means for every sale it makes, it is making less profit, in this case almost nine percentage points less.

In addition to reimbursement pressure, Walgreens also made a poor acquisition when it acquired a majority stake in VillageMD and then helped the company expand through its purchase of Summit Medical. The owner of primary care medical clinics was unable to successfully expand beyond its core geographical footprint and has been a drag on Walgreens' operationing results. Walgreens also recently revealed that VillageMD was in default of a $2.25 billion secured loan it had provided to the company.

With Shares Down Over 60%, Is Now the Time to Buy This Healthcare Stock? | The Motley Fool (1)

Image source: Getty Images.

How to fix the company

In a regulatory filing, Walgreens noted that it was evaluating its options with regard to VillageMD, including a potential sale of the entire business. This would be the best option in my view. While Walgreens would undoubtedly lose money on any sale, it would be addition by subtraction getting rid of its majority stake in this money-losing investment.

As for its core pharmacy business, the company has started to shut down unprofitable stores across the country. This is a good move for several reasons. First, it will reduce costs by having fewer stores and less overhead. Second, while it will lose some revenue, it will also likely retain a lot of sales as customers move their business to other nearby locations. This should help boost same-store sales and margins, as it handles more traffic volume under a smaller cost structure.

Over the long term, the company still needs to try to alleviate the constant reimbursement squeeze. On that front, Walgreens has been in talks with PMBs and payers to implement a cost-plus drug pricing model where it gets paid based on the amount of service it provides. Eventually the reimbursement pressure will need to be alleviated and new models considered because forcing pharmacies out of business isn't going to be good for anyone over the long run.

Is it time to buy the dip?

From a valuation perspective, Walgreens is clearly on the clearance rack. It trades at a paltry 5 times earnings based on next year's analyst estimates. Meanwhile, using an enterprise value-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple to take into consideration its debt, the stock trades at just over 4 times.

With Shares Down Over 60%, Is Now the Time to Buy This Healthcare Stock? | The Motley Fool (2)

WBA PE Ratio (Forward 1y) data by YCharts

That's cheap any way you look at it. That said, a turnaround is going to take some time. The company needs to dump VillageMD, which, if it can find a buyer, will help reduce some of its debt load. Then it needs to optimize its store footprint and convince PBMs to implement a more favorable model than the one currently being used.

If it can do these things, the stock could have a lot of potential upside. If it cannot complete these actions, then the stock could turn out to be a value trap.

With that in mind, I would take a position in Walgreens because I think eventually the company should be able to see better days ahead. However, I would keep the position small given the potential risks.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

With Shares Down Over 60%, Is Now the Time to Buy This Healthcare Stock? | The Motley Fool (2024)

FAQs

What is the best healthcare stock to buy in 2024? ›

Some of the best health care stocks for August 2024, based on 30-day returns, include Q32 Bio, Longboard Pharmaceuticals, and uniQure.

What are the best healthcare stocks to buy now? ›

The Best Healthcare Stocks to Buy
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Aug 8, 2024

What is the outlook for healthcare stocks? ›

S&P's estimates project healthcare stocks will generate earnings growth of 14.8% in 2024, closely in line with growth expectations for the broader S&P 500.

What stock will boom in 2024? ›

10 Best Growth Stocks to Buy for 2024
StockImplied upside*
Mastercard Inc. (MA)19.4%
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T-Mobile US Inc. (TMUS)6.9%
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Is healthcare a good investment right now? ›

Investing in health care is a reliable option due to its ability to withstand market volatility. Health care stocks underperformed the S&P 500 in 2023, but they can often be a solid defensive play in an uncertain economy.

What is the hottest stock to buy right now? ›

Sign up for Kiplinger's Free E-Newsletters
Company (ticker)Analysts' consensus recommendation scoreAnalysts' consensus recommendation
UnitedHealth Group (UNH)1.27Strong Buy
Emerson Electric (EMR)1.30Strong Buy
Microsoft (MSFT)1.32Strong Buy
Nvidia (NVDA)1.32Strong Buy
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Why is Eli Lilly stock so high? ›

Eli Lilly (LLY) stock surged in early August, buoyed by second-quarter outperformance from its diabetes and obesity treatments Mounjaro and Zepbound. Mounjaro sales rocketed more than 215% year over year. The type 2 diabetes treatment is Lilly's biggest moneymaker.

Which stock is best for 2025? ›

The Union Budget 2024-2025 has laid a strong foundation for various sectors, offering numerous opportunities for investors in the share market today. The highlighted stocks – Natco Pharma, Career Point, Himadri Speciality Chemical, Protean eGov Technologies, and NCC Ltd – present significant potential for growth.

What stock has the best 5 year forecast? ›

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Live Nation Entertainment, Inc. (LYV)80.3%
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Meta Platforms, Inc. (META)30.0%
Full Truck Alliance Co. Ltd (YMM)29.0%
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What is the stock price forecast for United Healthcare in 2025? ›

According to analysts, UNH price target is 624.26 USD with a max estimate of 680.00 USD and a min estimate of 567.30 USD.

Which medical share is best? ›

Best Healthcare Stocks in India 2024 as per Analyst Ratings
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Jun 2, 2024

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