Walgreens Boots Alliance (NASDAQ: AMB) It's a very risky stock right now. The pharmaceutical retailer has struggled with profitability, increasing sales hasn't been easy and its future is a big question mark right now.
This won't be a suitable investment for most, given the risk involved. But if you're looking for a potential contrarian investment, below I'll list the reasons why the stock could actually turn things around. It may not be very likely to happen, but here's why the stock isn't necessarily doomed.
1. The company has a lot of stores and assets that it could liquidate.
Selling assets isn't a great sign for a company, especially if it's necessary to increase cash flow. But with Walgreens, the company may be a bit bloated with more stores than it needs. Closing some could simplify its operations and improve profitability. Earlier this year, new CEO Tim Wentworth said that “the current pharmacy model is not sustainable” and suggested that Walgreens could close as many as a quarter of the 8,600 stores it has in the U.S.
The company is also considering selling its Shields Health pharmaceutical business and divesting VillageMD, which was once seen as key to growing its healthcare operations. These may be drastic moves, but by implementing them, the business could be in much better shape in the long run.
2. New CEO Tim Wentworth isn't afraid to make big changes
It's one thing for a company to say it's… considering Selling assets and making big changes is one thing, but actually doing it is quite another. Under its new leadership, I'm confident that there will be no option that is out of reach for Walgreens if it means the company will improve in the long run.
That was evident when in January, Wentworth made a significant move in Reduce the company's dividend By almost 50%. For a company that had been increasing its payouts for decades, it wasn't an easy decision to make. But since Wentworth is new to the job, having joined in October of last year, he had a fresh view of the business and proved he can make tough decisions, so I think Walgreens has a chance.
3. The company generated positive cash flow last quarter.
Walgreens isn't doing so well right now (it's had losses in three of the last four quarters), but at least it's generating positive cash flow. That's more important than just publishing a report. accounting profitwhich includes non-cash expenses. A positive cash flow means that the company's operations are sustainable, and if that trend continues, it will put less pressure on the company to liquidate assets in order to increase its cash balance.
Over the past 12 months, Walgreens' operating cash flow totaled $725 million. In two of the past four quarters, its cash flow has been negative, but in the most recent period, which ended May 31, it had $604 million in cash and even reported free cash flow of $327 million. That's a good sign that the company may not be in dire straits.
Should I risk investing in Walgreens stock?
Walgreens stock has fallen 65% this year and there is no guarantee that it has bottomed out and can't go lower still. It's even possible that it will fall further next year. But if Wentworth can make the business more efficient and prove that Walgreens is a safe business to invest in again, the upside potential could be significant and it could easily double in value given its sharp sell-off this year.
It won't be easy and it may not even be likely, which is why this healthcare stock is primarily a suitable investment option for contrarian investors with a high tolerance for risk. For other investors, the much safer strategy is to wait on the sidelines for now and see how the business does in the coming quarters before investing in it. You may miss out on some gains if Wentworth is able to successfully help turn things around, but you may also avoid some losses in case things don't go as planned.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a Disclosure Policy.
3 Reasons Walgreens Boots Alliance Stock Might Not Be Doomed Originally published by The Motley Fool
