Walgreens Boots Alliance: High-Quality Business at High FCF Yield

Bogumil Baranowski of Sicart Associates presented his in-depth investment thesis on Walgreens Boots Alliance (US: WBA) at Best Ideas 2021.

Thesis summary, provided by Bogumil:

Walgreens Boots Alliance is one of the two largest US pharmacy chains. With $140B revenue, $35B market cap, $39 stock price, and 4.7% dividend yield (40% payout ratio). It trades at around 10x earnings. It’s a steady margin, high cash flow business with favorable long-term industry trends. The stock is down, cheap, and out-of-favor. With low expectations, we think WBA is due for some positive surprises. The upcoming CEO change may prove to be the much-needed catalyst.

The stock price dropped from $85 a year and a half ago, down 50%; it’s at an 8-year low or the same price as the 2000 and 2006 peak, whichever way you want to look at it. It’s a much bigger, more profitable business than back then.

It was in the $50-$55 range before COVID. It held up fine at first, then dropped to around $40, and it’s been there for the last few months. It peaked in mid-$80s due to take out, going private excitement. It dropped last year due to lots of short-term concerns: CVS/Aetna deal, price deflation in generics, Amazon entering the space, weaker quarters, tougher comps, more big picture negative headlines about drug prices (push back on rebates that PBMs get — Pharmacy Benefit Mgmt).

The company has $4-$5B in profit, $4-5B in FCF, hence over 10% FCF yield. There is a $2B cost savings plan in place. It has $16B in net debt vs. $6B in EBITDA.

There seem to be no buy recommendations among Wall Street analysts, which is the most negative sentiment in a while. Even Barron’s ran an article calling WBA out for being a Dow laggard second year in a row and claiming the hopes aren’t high for 2021. We get excited when others lose hope, but the business is still holding up fine. It sets the stage for positive surprises. 2020 was a mixed year, with the business doing well at first due to hoarding, followed by less traffic later.

Business mix: It’s 70% pharmacy, 30% retail business (with high markups, that’s an even higher margin business). Their geographic breakdown: 75% US, 25% (UK and Mexico). 13,000 US locations total, they are within 5 miles from 80% of the people in the US. 75% of business is paid by commercial insurers, 25% by govt. Almost 19,000 total locations in 25 countries. 440,000 employees, $140B revenue.

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About the instructor:

Bogumil Baranowski is a founding partner of Sicart Associates, a New York City based boutique investment firm catering to families and entrepreneurs on both sides of the Atlantic and the Pacific. He has 15 years of investment experience, and holds a Master’s degree in Finance and Strategy from Institut d’Etudes Politiques de Paris (Sciences Po), and a Master’s in Finance and Banking from Warsaw School of Economics. He is the author of Outsmarting the Crowd – A Value Investor’s Guide to Starting, Building and Keeping a Family Fortune (2015), and Money, Life, Family: My Handbook: My complete collection of principles on investing, finding work & life balance, and preserving family wealth (2019). He is a TEDx Speaker, and a former Executive Board member of one of the oldest and most advanced Toastmasters International clubs in New York City, and an Instructor at MOI Global (The Community of Intelligent Investors). His articles regularly appear on Seeking Alpha.

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