Value-focused investors are always on the lookout for stocks that are priced below their intrinsic value. One such stock that merits attention is Walgreens Boots Alliance Inc (WBA, Financial). The stock, which is currently priced at $17.53, recorded a loss of 1.6% in a day and a 3-month decrease of 23.24%. The stock's fair valuation is $40.82, as indicated by its GF Value.
Understanding GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock derived from GuruFocus's exclusive method. This valuation is calculated based on historical trading multiples like PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow, adjusted by the company's past returns and growth, and incorporating future estimates of business performance. Typically, if a stock price is significantly below the GF Value, it suggests a potential for higher future returns.
However, investors should conduct a thorough analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Walgreens Boots Alliance should not be ignored. These risks are primarily reflected through its low Altman Z-score of 1.64, indicating potential financial distress and the possibility of Walgreens Boots Alliance being a value trap.
Decoding the Altman Z-Score
The Altman Z-score, developed by Professor Edward I. Altman in 1968, is a financial model that predicts the probability of a company entering bankruptcy within two years. It combines five different financial ratios, each weighted to produce a score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates low risk.
Company Overview
Walgreens Boots Alliance is one of the largest retail pharmacy chains in the U.S., operating over 8,500 locations. Nearly three-quarters of Americans live within five miles of a Walgreens. The company generates roughly two-thirds of its revenue from prescription drug sales, making up 20% of total U.S. prescription revenue. Additionally, Walgreens sells retail products and operates in European drug wholesale and healthcare, with more locations incorporating services like Health Corner and Village Medical, enhancing its position as a one-stop healthcare provider.
Financial Health Indicators
An analysis of Walgreens Boots Alliance's financial ratios over the past three years reveals troubling trends. The Retained Earnings to Total Assets ratio has been declining (2022: 0.42, 2023: 0.34, 2024: 0.31), indicating a diminishing ability to reinvest in its business or manage debt effectively. Additionally, the EBIT to Total Assets ratio has shown a negative trend (2022: 0.08, 2023: -0.05, 2024: -0.16), suggesting decreased operational efficiency.
Furthermore, the asset turnover ratio, which measures how effectively a company uses its assets to generate sales, has fluctuated (2022: 1.50, 2023: 1.42, 2024: 1.51), pointing to potential underutilization of assets or decreased market demand for the company's products or services.
Conclusion: A Closer Look at the Investment Potential
While the low stock price of Walgreens Boots Alliance relative to its GF Value might appear as an attractive buying opportunity, the company's financial health indicators, such as the low Altman Z-score and declining efficiency ratios, suggest that it could be a potential value trap. Investors should proceed with caution and consider these risks when evaluating the investment potential of Walgreens Boots Alliance.
For investors seeking stocks with high financial stability, the Walter Schloss Screen on GuruFocus can help identify companies with strong Altman Z-scores.
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
