Motley Fool Hidden Gems Investing - Is Walgreens Your Next Healthcare Giant?

Episode Date: January 4, 2024

Walgreens’s new CEO has some big plans. (00:21) Bill Barker and Deidre Woollard discuss: - The big tasks ahead for Walgreens’s new CEO. - What a dividend drop might be signaling. - How price drops impacted Big Egg. (17:23) Jim Gillies and Ricky Mulvey talk pullback stocks including Aritzia and Shopify. Companies discussed: CALM, WBA, TSE:ATZ, ATZAF, SHOP Get your dividends report here: www.fool.com/2024dividends Host: Deidre Woollard Guests: Bill Barker, Jim Gillies, Ricky Mulvey Producers: Mary Long, Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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Welcome to Motley Fool Money. I'm Deidre Willard here with Motley Fool analyst, Bill Barker. Bill, good to see you. Happy New Year. Happy New Year. Thanks for having me. I love to talk earnings. It's been a minute since I got to. I feel like we're currently in the calm before the storm in a few weeks, but we do have some to talk about. Exciting to me, at least. I want to start with the one I'm watching closely. I'm a shareholder of Walgreens Boots Alliance. More formally, we just call it Walgreens. But I'm interested in this one for two reasons. So, you've got this new CEO, Tim Wentworth, he's got a healthcare background, he replaces the CEO,

I really was excited about Roz Brewer, she was there, I think, less than two years, that didn't really work out. And you've also got this company that's kind of in this pharmacy to healthcare shift. So, Bill, new CEO, how long before I start judging Tim Wentworth's performance? Oh, I don't know. Have you listened to him? Have you listened to the conference calls? You you can judge him right away if you want. I did listen, yes. And what did you think? I feel like he's very aware of the problems the company is facing. And I feel like he has a plan. And I'd like someone who feels like they know what the plan is, even when a company is not in the best space at this point.

All right. So you know what the plan is, and he's explained it. And so you understand what you think they're up to. At the point at which he is offering timelines or directions that don't appear, then you can judge him poorly. At the moment, he came in early October, early mid-October. This is the first report since he came in. You expect something a little bit like this, sort of a big bath report where you throw in a bunch of charges and you sort of wave all that in the past, one-time stuff. Going forward, I'll be judged from the point at which I have cleaned up the mess. And this was part of defining some of the financial position of the company as a mess that is being put into the back, uh, put into, into the past that includes the dividend

cut. Yeah. Let's, let's talk about that. Cause that's part of the big bath approach is okay. You get all the hard stuff out of the way you, you know, you, you ascribe it to the past situation and you move forward, but yeah, 48% reduction in the dividend payout to 25%. Obviously the market doesn't love this. I mean, it makes sense. You've got operating losses here. It's going to give you cash. But if you're someone who's holding this stock for the dividend, you're not happy. If you're a larger institution, you're probably not happy about this as well. What are some of the repercussions besides it going down in the market today? Well, of course, the market had, I think, anticipated with the stock price even before today that there was going to be a dividend cut.

That is, the yield was 7% to 8%, somewhere in there. That just doesn't happen, particularly with a company that is not in a position to keep that up, given the amount of cash on hand and the debt that Walgreens Boots Alliance has. I don't think this was entirely unexpected. Maybe the degree, taking it down basically by half, that may have been a bit more of a surprise than the fact that a cut was made at all. The market just was not pricing in an anticipation that this dividend could be maintained or else it just wouldn't have been at a yield of 8%. But in general, when you have a dividend cut, you can either see it two ways. You can see it

as a sign that the company is really in trouble, or you can see that it's a sign that the company is being prudent and taking action. I think it's more the being prudent and taking action here. How do you view it? Well, I view it as evidence of some restriction on their capital allocation choices. They can't allocate capital the way they had, given the number of acquisitions that they had made and the dividend where it was, and hoping to maintain that, especially with a large chunk of the company's debt maturing in the next couple of years. So, they're going to have to issue new debt. They have cash on hand to fund operations, but they're going to need to, I think, have some debt at higher levels given today's interest rates than when they issued the debt. So the

capital allocation choices are not extensive at the moment. They need to fix their balance sheet. And this is a prudent step in terms of doing so. Yeah, that's a really good point with that. But you want to try to pay off as much of that as you can before you have to move on to that higher interest rate. And part of that is those acquisitions that you mentioned. It feels to me like, like they're, they're done with the acquisition part of the healthcare pivot, uh, you know, with the, um, with, with that part of things, and maybe they're at the integration part of this. And, you know, I'm thinking about this, not just in terms of Walgreens, but you've got the, if this isn't everybody into the pool situation, CVS a little bit further ahead on this,

on this pivot. Kroger is looking at health. Walmart, obviously. Amazon is trying to figure it out. Everyone's trying to figure it out. I feel like Walgreens kind of needs it to work more than some of those others, although maybe not more than CVS. What do you think about this, when you've got a bunch of companies trying to chase this one thing, most of them doing it by acquiring other smaller companies and trying to patch together something? There's a lot of competition here. You've got increased use of mail, people getting their drugs delivered by mail. You've got more and more players, as you mentioned, the Walmarts, Costco, Kroger, Safeway, everybody you can name can do a lot of what Walgreens'

substantial business is. You've got pharmacists who are striking. You've got competition from a lot of different places. They're the No. 2 player, a huge operation. They're well-known and trusted by millions. But the opportunities to increase their prices are very limited, I think given especially some of the attention that's being paid to the PBMs, which is a remarkable amount of advertising, and actually one of the few issues that you can find where there seems to be some bipartisan agreement that this is something worth addressing. One thing I think is interesting with Walgreens is the retail side wasn't so bad. And they saw some good growth in pharmacy, but a lot of that was due to the cost of drugs.

But you mentioned the pharmacists, and this part I think is really interesting, because on the earnings call, Tim Wentworth, you talked a bit about how they're working with colleges, they're trying to build that pipeline of pharmacists. And that's important because there aren't enough pharmacists out there, and the pharmacists that are there are clearly not happy. you had what they called farmageddon in October with pharmacists walking out. And so, you know, part of that is, okay, you get more pharmacists and that maybe takes some of the workload off. But I also think workers feel, we've seen workers feel more empowered lately. And so

with Walgreens, do they also have to make those existing pharmacists happier? Well, apparently they do. You can't sustain too many strikes like that. People will just go elsewhere. And when they're used to getting everything always at Walgreens, getting everything fulfilled there, because Walgreens has already got my insurance information, I can just go there, and they are forced to find other outlets to get their needed pharmaceuticals and prescriptions filled, that's bad for Walmart, for its loyal customers to be finding who else does exactly what Walgreens does for them, but maybe more reliably, maybe at better prices for some people when they finally have to go out and check out the competition.

a really difficult spot for them to be in. They need more pharmacists. The pharmacists they have have demonstrated that they're not happy. Walgreens is, right now, in the midst of trying to execute substantial savings operations in terms of billions of dollars of annual savings on costs. So that is a limiting factor on just throwing money at the problem. Yeah. And it's interesting too, I think about this for the long-term, thinking about the role of the pharmacist, because you've got an aging pharmacist population currently, so you need to bring more pharmacists in. But at the same time, you maybe have some of the pharmacist role being automated or taken over by AI in some way. And I mean, who knows what's down the road? AI gets

into everything. But I think it's interesting that it's one of those areas where you have aging pharmacists and you also are probably going to have an aging population. So you're also going to have an increasing amount of prescriptions and you kind of need to have that knowledge. So it's a tough spot to be in. It's a tough spot for Walgreens. Fortunately, right now, in terms of the stock and the company, it's trading at less than seven times adjusted earnings. They reiterated this year's adjusted earnings. The adjusted earnings are very different from the gap earnings at the moment. We mentioned the maybe one-time charges that were lumped into this quarter. But if you can deliver at the high end of

the range, $3.50 a share of, and let's emphasize, adjusted earnings. For a stock that's trading at less than seven times that amount, if they deliver that this year, the stock's going to go higher from here. It's not going to hang around at less than seven times earnings once you convince people that those earnings are repeatable and that you start eliminating the adjustment out of the equation. I'm going to take us in another topic. We're going to talk about eggs. One of the things I find fascinating is that there's this one company that really is, a friend of ours called it Big Egg or Big Yolk. It's CalMaine. This is interesting because this time last year, especially around the holidays, everybody was freaking out

around the price of eggs and inflation in general. Inflation has dropped. Some prices have not dropped with it, unfortunately, but eggs, egg prices have dropped a lot. So good news for us, bad news for, for Cal Maine, cause they're the biggest producer of shell eggs. So according to the company at the end of last year, uh, they were, they were getting $2 and 88 cents for a dozen conventional eggs, uh, end of last year, uh, $1 45. So huge, huge drop. And yet this company, I mean, this is an interesting one. It's performed well over the past five years. Not so great over the past year because, you know, egg prices. How do you think about businesses that are so dependent on really a single product like this? Well, I would certainly start by saying I have

no ability to tell you what is going to happen with egg prices from year to year or decade to decade. They'll probably go up over the course of a decade. But there are things that happen that dramatically affect. It's a commodity. There's no brand value to eggs. The things that happen, like an avian flu outbreak, which is happening again, and which took egg production for CalMain, virtually took it down by half from the fiscal year of 2016 to 2017, that could happen again, that would drive up egg prices, but that's not a good thing if that's how it occurs. If CalMain can do a better job of protecting its eggs and livestock than the competition so that it has much less exposure to something that affects the market as a

a whole, then that would be advantageous to it. But they're not looking for avian flu to in any way improve what happens for shareholders. That's just not going to happen. So, I think you're exposed. You're exposed when you are a company that has one product. It's a very fragmented market, and they can continue to acquire some of the competition, as they've been doing sort of relentlessly over the last 30 years. But the nice part about this one product is, it's something that people have always wanted and we assume will always want. Yeah, that's true. They've done some smaller acquisitions. I know they're buying an old Tyson broiler factory. They're going to convert that to egg production. You mentioned

the branding. Yeah, there's egg brands, but there's no main egg brand. But there are types So they've got CalMaine, they have conventional eggs, but they've also got specialty eggs. So that's things like organic, cage-free, smaller part of the business, but they're able to control the prices. So Bill, are you the regular egg buyer or are you looking for the cage-free or farm-raised? What's your egg? I am an infrequent buyer of eggs. There are other things that I'm more competent at buying.

But I think I've been known, when asked, I'm going to this store, what do we need? And eggs are thrown out, then I'll get them. But I have no idea what brand I might want to look for. But yeah, I typically would pick up the organic or cage-free or both, because that seems to be what we have in the house. So it's not price dependent for you? No. I am pleased to hear today that egg prices have been cut in half over the last year. I would not have been somebody who would have been able to tell you that from my purchasing experience. There are other products, the

prices of which I follow closer than that in the grocery store. I'm going to get you buying more eggs. Thanks for your time today, Bill. Thank you. You just found out that your sales team is at risk of missing quota. Don't panic. Just ask Rippling AI. Since it's built on your real-time people and business data, Rippling AI can pull metrics from Rippling and Salesforce

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The market was on fire last year, but one luxury retailer didn't join the party. Ricky Mulvey caught up with Motley Fool Canada's Jim Gillies to talk about a couple of pullback stocks and setting expectations for investments in 2024. Jim, we have been tasked with discussing some pullback stocks, and I feel like this is the harder job to start the year with a segment. This would have been much easier if we were recording this just a few months ago. And I'm a long-term investor. I want to let my winners run. And I'm feeling a little wary right now. Tech stocks rose about 50% in 2023. They feel like we're at zero interest rates again. How can investors set their expectations during what some may feel

is a little bit of a market mania? Sure. Well, yes. Obviously, it would have been very nice to have done this show, say, around the end of October, early November, before the markets just decided, hey, party on, guys, let's go, and ran up. I'm going to push back a little bit. I don't know that I would consider us to be in a market market mania phase. I don't feel terribly bad that, yes, tech stocks are up in the last year, largely due to the so-called now-magnificent seven that are at the front of the S&P 500 and of the NASDAQ, that, of course, being Meta and Microsoft and NVIDIA and Apple, Amazon, and there's two more in there. I think for starters, at the start of the year,

we've gone on valuation. Second of all, I don't know that I would agree that we're back to interest rate levels. And so, you know, I'm a Canadian. And so, you know, our tech sector basically consists of two companies, Shopify and Constellation Software. I will point out, you know, Shopify today, it's up 120% in 2023. I mean, yay, right? That's fantastic and great. Still about 55% below its all-time high, you know, which tells you, I think, a little bit about how crazy things got during the tail end of COVID, running up to, say, November 2021, maybe early 2022, and how much things fell such that you can get 120% gain in a year, which by all accounts is a pretty good year, and you still need to more than double to get back to where you were

at one point. I think a lot of this may be a little bit of recency bias, where we look at what's happened in the last three or six months and go, boy, things have gotten really expensive. What I like to do when I'm feeling this way, and it's something that when I talk to other young analysts in a mentor role or when I'm trying to annoy a coworker of mine who might like a stock that I loathe or vice versa. I always try to ask, I like to say there's two questions that matter in investing. There's two questions. The first question is, what is it, whatever the stock is, what is it worth and why? And I kind of feel that if you can answer those questions in any market environment, euphoric, despondent, flat, I think you're probably on

pretty good ground there. I mean, you're going to be wrong, obviously, because we don't have perfect foresight. But it kind of helps a framework to start deciding, well, what is it worth? What is a Constellation software worth? Why is it worth that? What is a Facebook slash meta worth? Why is it worth that? I mean, meta is up, what, I think it came into the year sub $100, and now it's over $300. I mean, to be perfect. That's pretty good. Well, it's pretty good. But I actually bought and sold, I still call it Facebook. I actually bought and sold Facebook in early 2023 for a fairly quick double. I don't particularly like the stock. But I looked at it and kind of answered those questions, what is it worth and why? And

said, well, it's worth considerably more than where it hits trading here at, what, $80 or $90 bucks kind of thing. It was basically, and I know the PE multiple has faults. At one point, Facebook was trading less than the regular S&P 500 multiple. And it feels like if you own that much of the internet and you have 3 billion people interacting with your platform, those network effects got to be worth a little bit more than the average. Yes. And you've just gone a long ways to answering the second question, the why. One of the things, if you're going to take advantage of stocks in a pullback is you got to have some dry powder to do so. How are you thinking about, as we start the new year, how are you thinking about your cash position? How should

investors think about their cash position right now? My cash position was fairly large coming into autumn 2023 for various reasons. Most of it, I actually deployed between September and November. So, I'm a little light on cash at the moment, but I think given what's happened in November, December, that turned out to be fairly prudent. But then the trick becomes, unless you're going to sell something to buy something else, which means you have to get two decisions, right? You have to get the selling correct and the new purchase correct. I prefer to replenish my cash position. And so, I'm in the privileged position of I'm still gainfully employed, at least knock would until the end of the year. And so every paycheck, every paycheck, X percent goes into

the investment account. X percent of my significant other's paycheck goes into the investment account. And so you're continually adding cash for future now, obviously, as your portfolio ideally gets larger, those incremental cash ads become less and less important. But also, I think that I know is going to air in the new year, but I'm a big fan of tax loss harvesting." Again, you're going through that little mini framework of mine, what's it worth and why. In this case, it makes you forced to look at, insert name here, whatever, this stock is down 50%, 60% this year. Why is it down so much? What's happened? You start answering those questions like maybe management biffed an acquisition, maybe you simply paid too much when you bought it, and the prospects, growth has

fallen off at the company, so the prospects might not be great for a recovery. But these types of things allow you to say, okay, I'm going to harvest for tax loss purposes, or I'm going to harvest some losers to redeploy in the new year into winners. And maybe if you avoid wash sale rule things, maybe you still like the company, you sell it now, you buy it back in the new year after the, what is it, usually 30 days, I think, for wash sale rules. We're doing December advice in January, Jim. Well, it's a funny thing, Ricky. December comes every year. I think you can very comfortably start planning for December 2024. Also, nothing says you can't take a tax loss in, say, June.

When we talked about what's it worth, you got to know a little bit of the multiples to tell the story. One industry you pay attention to is retail. I'll say the physical retail space. There's one ETF covering it called XRT, still off about 30% from COVID highs. Since this is one of your playgrounds, how are you looking for opportunities in this space? Are there one or two valuation metrics that newer investors coming into this show can use to compare those physical retailers? Well, they're not easy. Unfortunately, they're not easy metrics to find. I mean, anyone can look up same-store sales or comp sales or whatever we're doing the metrics of. Everyone can look up an earnings multiple. May or may not be terribly useful, frankly. My preferred thing

is to say, okay, if I want to look at something in the retail space, although it could apply to pretty much anything, is I would encourage new investors to take an extra step. I want them to take an extra step because the more extra steps you take and you understand why you invest in the things you do and you understand how to maybe look at a company, that gets you more involved. It makes you more sticky. I think it makes you a more long-term investor because you are starting to build. The dirty little secret, we recommend stocks for a living, but we certainly don't know everything about a company on the day one where we recommend it. We're building relationships. I know and I learn more about a stock I've invested in a year, two years, three years down

the road. But one of the things that I'm a real big fan of cash flow, as you know. For a newer investor, I would say, okay, acquaint yourself with a company's financial reports. Look up the annual report. You don't need to look at quarterlies yet, but go find the most recent annual report. It'll be on the company's website under their investor relations section. There are three main financial statements, and they're all important in their own way, but ignore the income statement for now. Ignore the balance sheet for now. Just go to the cash flow statement and look up two lines. The first line is cash flow from operations or from operating activities quite often said. And the second line is down in the section on investing cash flows,

and they'll say capital expenditures or purchase of PP&E, property plan equipment, that sort of thing. And simply take operating cash flow and subtract what the company spent on CapEx. And that gives you a rough idea of what the company produced in terms of cash flow. Cash flow that they don't need to finance and roll into and finance their own activities. It's cash flow that, in theory, they could just turn around and hand all of it to their shareholders. In theory, it's called free cash flow. Do that, and then compare that to the price or the value of the company, the entire market cap of the company, which is the share price multiplied by the number of shares. You can even maybe bring in, if the company employs debt or whatever, you can even

bring in debt and say, add that in. But you want to pay a reasonable price for whatever you're getting. So, the next thing, though, is understand a little bit of the business you're buying. So, just for fun, we'll throw out here GameStop, the famous meme stock that got everyone in a tizzy a couple of years ago. Sells video games, collectibles, video game systems, what have you. Not a lot of growth there, so you'd like to see them producing more cash because that is an industry that's kind of on the decline, kind of going away. There's always the fear that physical media will just disappear and everything will be streaming. So, you'll get your games the same way you get your Netflix. And so, if you did want to buy GameStop, and I'm not a fan of

GameStop at this price, but if you did want to buy GameStop, you would start gauging and say, if I could pay less than 10 times cash flow for this, and I'm reasonably sure the cash flow is decent, maybe that's a reason. In this type of a company, maybe it's good. But since we are trying to talk a little bit about rebounds or maybe buying opportunities on pullbacks, there is a Canadian retailer that I've got my eye on and that I have recommended in the service that I front. It's a company called Aritzia. I am not a fashion plate, of course, but other people are. And it's been very, very successful in Canada until really the last year. And it was really successful. The ticker is ATZ on the Toronto Stock Exchange. And

there is a pink sheet listing, which I don't have off the top of my head. But it's a couple billion dollar company, I believe. And they basically, they're maxed out in Canada in terms of their growth here. But they're not trying to grow in Canada. They are coming south. We are invading the United States. And so Aritzia has been very deliberately coming into the States following a strategy because they are very popular here. And a concept that works here generally could work there. An example I would give you, Canadian company where kind of maxed out in the country and worked very well here and has also worked very well down there. You've heard of Lululemon, right heard of it heard of it i own the stock as well beautiful yeah that's a that is a great

example of what i'm looking at with aritzia here because you know you might remember about a decade ago lululemon currently about 500 a share was a 35 a share stock because they'd gotten beaten down they had some executive turmoil they had a bit of a scandal some of their very popular uh leggings were denoted as see-through, not generally good. And so, the stock got beaten down as a result. And that's kind of where Aritzia is right now, because they kind of turfed on some of their fashion. They kind of turfed on some of their growth plans. The stock is down 40% this year. But they are spending significant cash. So, we look at our cash flow, and they're spending a little bit more cash than they're making right now. But the reason for that is for this broad push

into the U.S. And if it works similar to what Lululemon did, they're able to correct their problems, they're able to continue their growth trajectory. This could be really interesting for investors in, say, five to seven years. Jim, I think you just answered the last three questions I had in the outline with that one. No. One of these days, we're going to have Gilly's rants unleashed on the show, and I can't wait for that day. Jim, as always, appreciate your time and your insight. Thank you, Ricky. Take care. As always, people on the program may have interest in the stocks they talk about,

and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Willard. Thanks for listening. We'll see you tomorrow.