Walgreens (NYSE:WBA) shares are trading at $22 each as of Thursday, marking a significant decrease of nearly 60% since March 2021. This downturn contrasts with the S&P 500's 18% gain during the same period and has been attributed primarily to a slowdown in sales growth resulting from decreased demand for COVID-19 testing and vaccination, as well as recent opioid-related settlements.
The current stock value represents an over 45% undervaluation compared to Walgreens' estimated worth of $32 per share. However, the likelihood of the stock returning to its pre-inflation shock level of over $57 appears slim in the near term.
The company's stock performance has been negatively affected by turbulent market conditions that began in 2022, triggered by an inflation shock due to increased money supply in response to pandemic lockdowns. The situation was exacerbated by shipping disruptions and labor shortages, leading to inflation rates crossing 4% by April 2021.
In early 2022, Russia's invasion of Ukraine led to spikes in energy and food prices, prompting the Federal Reserve to initiate its rate hike process. Inflation levels peaked at 9% by June 2022, a 40-year high, causing the S&P 500 index to drop over 20% from peak levels. The Federal Reserve continued its aggressive rate hikes through July to September 2022, contributing to a sharp decline in the S&P 500, followed by a partial recovery.
This period of economic instability had a significant impact on Walgreens' stock performance. This contrasts sharply with its performance during the 2007-2008 financial crisis when it managed to recover post-crisis, rising 56% between March 2009 and January 2010.
Despite these challenges, Walgreens saw its revenue grow from $120 billion in FY19 to $133 billion in FY22, partly due to contributions from COVID-19 vaccine and testing. However, the company's operating margin shrank from 5.2% in 2019 to 1.6% in 2022, largely due to opioid-related settlements.
Walgreens' total debt, including lease obligations, decreased from $40 billion in 2020 to $36 billion in 2022. Its cash and investments remained steady at around $8 billion over the same period, and it generated $4 billion in cash flows from operations in 2023. This suggests that Walgreens is capable of meeting its near-term obligations despite high debt levels.
While there are potential risk factors such as unfavorable macroeconomic conditions, weak consumer demand, and high debt levels, Walgreens stock might see some gains once fears of a potential recession subside due to the Federal Reserve's efforts to control inflation rates.
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