Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Grocery Wars

Walgreen Boots Alliance Struggles to Survive

Walgreen Boots Alliance (NASDAQ: WBA) is in a very strange position. It is a gigantic retailer with massive amounts of revenue and a vast footprint of stores that is struggling to survive.

Walgreen’s true problem is that it is having a difficult time getting income from all those stores. Even though its’ revenue is growing, Walgreen’s income is falling the latest earnings report shows us.

Walgreen reported a net income of $4.173 billion in August 2016 that rose to $4.306 billion in May 2017 and fell to $4.078 billion on August 31, 2017, ycharts data indicates. During the same period, revenues went from $117.35 billion in August 2016 to $116.7 billion in May 2017 to $118.21 billion in August 2017.

Why Drugstores cannot make Money

The drugstore giant is having a difficult time maintaining both revenues and income despite operating 8,175 drugstores in the United States. This explains why WBA was so anxious to buy the sick Rite Aid (NYSE: RAD) and its arch rival CVS Health (NYSE: CVS) is trying to buy the insurer Aetna (NYSE: AET).

It is very difficult to make money drugstore business right now. Aggressive competition from grocers like Kroger (NYSE: KR) and discounters Walmart (NYSE: WMT) and Amazon (NASDAQ: AMZN) is slowly wiping out both their pharmacy and toiletries business.

To make matters worse they are heavily dependent on insurers and the government for their revenue. Health insurance is both complex and unreliable. A major problem is that America’s largest insurance company is Uncle Sam, which is completely unreliable.

How Congress Threatens Walgreen’s Future

Congress is trying to defund the Obamacare subsidies for insurance, and failing to fund benefits such as CHIP (the Children’s Health Insurance Program). That’s potentially disastrous for drugstore operators because there were 5.8 million children in CHIP nationwide in 2017.

An even greater problem is Medicare which had 68.48 million users nationwide in July 2017, reported. Congress is also considering defunding that program as well.

There is no way companies can survive if the biggest financer of many of their purchases is totally unreliable. If Medicaid gets defunded as some Republicans are threatening, large numbers of Walgreen and CVS locations will shut down.

This is why both companies are desperately seeking additional revenues. It is the real menace of unreliable government not the theoretical threat of Amazon competition.

Is Walgreens a Value Investment?

Despite; or because of Congress’s unreliability, Walgreen is a value investment with a lot of growth potential.

The same Congress that is talking about defunding Medicaid and CHIP contains 16 U.S. Senators and 104 U.S. Representatives that support Medicare for All (single-payer health insurance). That means there’s a strong possibility such legislation might pass if a Democratic majority is elected in 2018.

There is also a good possibility that President Donald J. Trump (R-New York), who is on record as a strong single-payer supporter, would sign “Medicare for All” legislation. Trump is likely to sign a single-payer law because it might guarantee his reelection in 2020.

It is Not Amazon CVS is afraid of, its Single Payer

Medicare for All would be a boon for Walgreens by financing millions of new pharmacy customers and creating hundreds of thousands of new customers for its in-store clinics. That alone makes WBA a really good value investment to add to portfolios for the future but is it a value investment for the present.

Therefore a good way to think of stocks like Walgreen and CVS is as bets that single-payer healthcare is coming to America. CVS’s Aetna acquisition looks like a plan to create a centralized healthcare delivery system designed to cash in on single-payer healthcare, Medicare for All, or Medicaid expansion.

It would create combination clinics and pharmacies that provide a gateway to the healthcare system for working-class customers with Medicaid. The clinics; including those in Target (NYSE: TGT) would direct patients to CVS facilities for treatment or testing.

Such a system would also allow CVS to create lower-cost policies that can be marketed through Obamacare exchanges or provided directly to Medicaid recipients by state governments. It would also allow CVS to enter the lucrative Medicare Part D prescription drug plan markets.

Would Single Payer be Good for Walgreens (and CVS)

An Aetna acquisition is a very shrewd move because the Medicaid market is huge with 68.48 million potential customers. The Medicare market is also vast; it included 16.7% of all Americans or around 54.3 million people in 2016, according to Statista. If Democrats succeed in enacting Medicare for All that market will be far larger as many as 325.196 million people (the entire US population in 2017).

Another good portent is America’s 74 million baby boomers (persons aged 51 to 72) who are now old enough for Medicare – coverage normally begins at 65. Although many Democrats want that extended to 55, which would also be even better for Walgreen.

This makes CVS-Aetna a huge potential threat to Walgreens; because it would force Walgreens to buy a hospital or health-insurance company to compete. It also creates an environment where federal and state governments and the Centers for Medicare and Medicaid are Walgreen and CVS’s main “customers.”

This might benefit Walgreen which is already used to dealing with single-payer systems in other markets including the United Kingdom and Chile. WBA’s other big market is the UK homeland of the National Health.

Single-payer would benefit Walgreens and CVS Health by giving them a steady source of revenue. There would be no fear that customers would suddenly be cut off from insurance because of income, job-loss, age, or preexisting conditions. Medicare for All can hurt them by limiting drug costs and implementing stifling red tape or slow payment.

How Much Cash does Walgreens Have?

All this means that a company will need a lot of cash to survive in the brave, new, world of American healthcare. Fortunately, Walgreens has a lot of cash.

Walgreen reported $3.301 billion in cash and short-term investments on August 31, 2017. That was down dramatically from the $9.807 billion reported in August 2017, because of the Rite Aid acquisition. It should rise back to the high-level once Walgreens has absorbed all those Rite Aid assets.

The company also managed to generate $7.251 billion in cash from operations in August 2017. That was down from $7.847 billion in August 2016 – which proves why WBA needs more acquisitions like Rite Aid. Also down is the free cash flow which was $1.575 billion in August 2017, down from $2.237 billion in August 2016.

This proves Walgreen Boots Alliance is a value investment; because it has a lot of what Warren Buffett would label “float” – namely excess cash. There’s also a lot of value in the form of $66.01 billion in assets on August 31, 2017, an enterprise value of $75.54 billion and a market capitalization of $66.98 billion reported on 30 October 2017.

Walgreens has the resources to survive and profit in the new world of American healthcare. Therefore it’s a good long-term bet on the future of American medicine that pays a nice dividend: 40¢ scheduled for 10 November 2017. That is an increase of 2.5¢ from the 37.5¢ shareholders received in May.

Walgreens is definitely a value investment in the world of American retail and healthcare right now. It might be a good buy right now while the hysteria over Amazon pharmacies is driving down drugstore stock prices.