Walgreens Boots Alliance (NASDAQ: WBA) is a highly risky stock to own right now. The pharmacy retailer has struggled with profitability, growing sales hasn't been easy, and its future is a big question mark at this point.
This isn't going to be a suitable investment for most, given the risk involved. But if you're looking for a possible contrarian investment, below, I'll list the reasons why the stock could actually turn things around. It may not be highly likely or probable to happen, but here is why the stock may not necessarily be doomed.
1. The company has a ton of stores and assets it could liquidate
Selling off assets isn't a terribly good sign for a business, especially if it's necessary to boost cash flow. But with Walgreens, the company may be a bit bloated with more stores than it needs. Closing some down 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 up to one-quarter of the 8,600 stores it runs in the U.S.
In addition, the company is considering selling pharmacy business Shields Health and dumping VillageMD, which was once seen as key to growing its healthcare operations. These may be drastic moves, but by deploying them, the business could be in much better shape in the long run.
2. New CEO Tim Wentworth isn't afraid of making big moves
It's one thing for a company to say it's considering selling assets and making big moves, but it's quite another to actually do it. With its new leadership, I'm confident that there won't be any options that are off-limits for Walgreens if it means they will make the company better in the long run.
That was evident when back in January, Wentworth made a significant move in cutting the company's dividend by nearly 50%. For a company that had been raising its payout for decades, that was not an easy decision to make. But with Wentworth being new to the job, coming on in just October of last year, he had a fresh view of the business and has shown that he can make hard decisions, which is why I think Walgreens has a chance.
3. The company generated positive cash flow last quarter
Walgreens isn't doing great right now (it has incurred a loss in three of the past four quarters) but it is at least generating positive cash flow. That's more important than just posting an accounting profit, which includes noncash expenses. Positive cash flow means the company's operations are sustainable, and should that trend continue, it will put less pressure on the business to liquidate assets for the sake of boosting its cash balance.
In the trailing 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 on May 31, it accumulated $604 million in cash and it even reported free cash flow of $327 million. That's a good sign that the business may not be in a dire position.
Should you take a chance on Walgreens stock?
Walgreens stock is down 65% this year and there's no guarantee that it has bottomed out and can't go lower. It may even continue declining next year as well. But if Wentworth can make the business leaner and prove that Walgreens is a safe business to invest in again, the upside 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 mainly a suitable investment option for contrarian investors with a high risk tolerance. For other investors, the much safer approach is to wait on the sidelines for now and see how the business does in future quarters before investing in it. You may miss out on some gains if Wentworth is able to help turn things around successfully, but you can also prevent some losses in the event that 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 Why Walgreens Boots Alliance Stock May Not Be Doomed was originally published by The Motley Fool