Stock Analysis & Ideas

Analyzing Walgreens’ Risk Profile amid Boots Divestment

Walgreens Boots Alliance (WBA) is an American holdings company with global interests in pharmaceutical companies. I am neutral on the stock.

Boots Divestment

Walgreens is committed to offloading its Boots pharmacy chain in a valuation worth £8 billion ($10.9 billion). The company has reportedly received interest from ASDA, Bain & Company, and CVC Capital, with Sycamore Partners, Advent International, and Apollo Group also monitoring the situation closely.

A divestment of this magnitude can lead to a binary outcome. The first outcome could be a decrease in synergies, subsequently leading to a stock devaluation, and the second could be improved efficiency, in turn resulting in stock appreciation.

Walgreens’ sales-to-CapEx ratio of 96.3x signals that it holds an ultra-efficient portfolio of companies. The firm’s Boots segment provides it with lucrative cross-border exposure, opening up room for further collaborations and synergies in the area.

Furthermore, Walgreens is well hedged against cyclical consumer behavior in the United States with exposure to foreign markets with different monetary and fiscal policies.

I fully understand that the $10.9 billion in additional capital could provide Walgreens with scope to expand into different directions or alternatively to repay a portion of its outstanding debt; however, I see this sale as more of a loss and think that it will affect Walgreens’ equity value adversely.

Hedge Fund Sentiment

I wanted to study Hedge Fund sentiment to gauge how the market’s receiving the divestment news. According to TipRanks’ 13-F tracker, hedge funds have a negative outlook on Walgreens, with a total of 191.2K shares sold during the past quarter.

I’m not implying that Walgreens is headed for a bearish trend by any means, but it just seems as though the market isn’t backing the company’s Boots divestment as institutional volumes remain subdued.

Risk-Return Profile

Walgreens has a historical Sharpe Ratio of 0.67, suggesting that it isn’t the ideal risk-return play at the moment. The Sharpe Ratio measures a stock’s expected return with respect to market volatility, and we’re usually looking for a ballpark figure between 1.00 to 3.00 to justify an acceptable risk-return option.

In addition to an average statistical risk-return profile, Walgreens is battling to deliver fair shareholder value. According to TipRanks’ risk tracking algorithm, Walgreens may not provide the best stockholder value out there due to its board structuring, voting rights, and conflict of interest between stockholders and company agents.

A robust company doesn’t always translate into a stellar investment, as shareholder policies determine how much residual an investor can expect. Thus, it’s crucial for investors to keep tracking Walgreens’ proceedings as time passes.

Wall Street’s Take

Turning to Wall Street, WBA stock has a Hold consensus rating, based on two Buys, six Holds, and one Sell assigned in the past three months.

The average Walgreens Boots Alliance price target of $54.67 implies 18.3% upside potential.

Concluding Thoughts

WBA isn’t looking like a terrific risk-return option amid its Boots divestment. Hedge funds seem downbeat, statistical metrics aren’t looking up, and it has a questionable board structure.

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