Has Walgreens Fallen Enough Yet On Amazon Fears? – Walgreens Boots Alliance, Inc. (NASDAQ:WBA)

 In Business
The general 2017 trend of the Amazonification of everything continues. Any stocks tied favorably to Amazon, such as optical equipment makers or data center companies have been soaring, while any stock potentially at risk from Amazon gets pounded to oblivion.

In fact, when searching the 52-week low lists for potential bargains, it seems that more often than not, the bearish catalyst causing shares to tank is Amazon potentially wrecking the economics of the current business. We have no exception today with the pharmacy stocks, which have been dumped over the past week.

I’ll focus on Walgreens Boot Alliance (WBA) since I own a small position within my IMF portfolio. However, everything pharmacy is getting lit up, with companies such as CVS Health (CVS), Rite Aid (RAD) and Express Scripts (ESRX) dropping similar amounts. So, what’s caused this?

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WBA Price data by YCharts

While there have been rumors of Amazon entering the pharmacy space for years (and more credible stuff since this summer), a report from CNBC last week put a more tangible story out into the marketplace. CNBC reported that it had seen an email from Amazon saying that the company will make a final decision on whether or not to go into online pharmacy by Thanksgiving.

On top of that, Leerink’s analyst suggested the following:

Source

Needless to say, if Amazon does indeed enter the market within the next year or two, it will be a major blow to valuations for pharmacies. The healthcare supply chain and regulatory environment are indeed highly complex; however, Amazon has both the resources and long-term outlook willing to suffer through those obstacles if it decides that this is an undertaking worth the risk.

And, of course, Amazon always has the option of buying a pharmacy chain of its own, as it did with Whole Foods for groceries. Rite Aid stock bulls have clung to the idea of an Amazon takeover as a potential life vessel out of that sinking stock – and while I’m skeptical Amazon wants that store base in particular, the idea alone shows that Amazon has creative options to get into pharmacy if it so chooses.

Is Walgreens Cheap Enough Yet?

This past week’s drop is hardly the first decline for WBA stock recently. In fact, it was already on the verge of fresh 52-week lows prior to the latest news – this stock has entirely missed out on the general bull market rally in just about everything else over the past two years:

Since October 2015, WBA stock has trailed the S&P 500 by 50%. And as you might expect, that leaves it looking undervalued against the market. WBA stock is selling at 18x trailing and 13x forward earnings which seems great.

Throw in that Walgreens is a Dividend Aristocrat, and things look even better. The company has continuously raised its dividend since 1976, and has sported a 20% and 13% growth rate over the past 10 and 5 years, respectively. WBA stock now yields its highest since 2013 and, remarkably enough, yields more than it ever did during the financial crisis:

Source: GuruFocus

So, given that basic backdrop, it’s easy to make a case for going long on Walgreens around here. I have a cost basis in the 77s in my IMF portfolio, and figured at the time that it was a fine price, given the Dividend Aristocrat status and relative unlikelihood of its business being painfully disrupted in the near-term. But now we have to re-evaluate.

What’s A Business Worth, Post Amazon-Entry?

We have plenty of companies to look at lately, since Amazon has been causing stocks across retail-land to plummet left and right in 2017.

Consider, Autozone (NYSE:AZO), another stock I’ve started accumulating in my IMF. Up until just a couple of quarters ago, Autozone and the other parts retailers appeared internet-resistant. Now, the market has concluded that Amazon and other e-players are a massive threat. That’s led to an up to 40% shellacking for Autozone stock despite it putting up reasonable quarterly results:

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AZO data by YCharts

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