March 28, 2024

In today’s note, we discuss the recent earnings reports from Walgreens Boots Alliance (WBA). Our note also includes the monthly Catalyst Report and a summary of the April edition of the Cabot Turnaround Letter, which was published on Wednesday.

We encourage you to look through the Catalyst Report. This report is a listing of all of the companies that have reported a catalyst in the past month. These catalysts include new CEOs, activist activity, spin-offs and other possible game-changers. We source many of our feature recommendations from this list. You will find it nowhere else on Wall Street.

In this month’s issue of the Cabot Turnaround Letter, we discuss the most effective and often the only way to reverse the fortunes of a struggling company: a change in leadership. We offer our views on four new CEO situations that are currently attractive and three that are not quite ready yet.

This month’s Buy recommendation, Barnes Group (B), is an aerospace and industrial components maker that is stepping up its efforts to become more valuable, helped by a new CEO and urged on by pressure from a credible activist investor that recently gained several board seats.

This will be my last Cabot Turnaround Letter note, as I am moving on to focus on investing for my family. Your new chief analyst will be Matt Warder. I spoke at length with Matt earlier this week to help ease his transition and found him to be an experienced, thoughtful and capable analyst. He will no doubt bring reliable continuity to the Cabot Turnaround Letter, so you will continue to be in good hands.

Comments On Earnings

Walgreens Boots Alliance (WBA) – Once a retail pharmacy powerhouse, Walgreens faces secular challenges from an overbuilt, mature and poorly run store base facing plenty of competition along with enduring pricing pressure in its pharmacy operations. The poorly chosen first-round turnaround CEO was fired in September 2023. We anticipate that the second-round CEO, Tim Wentworth, who joined in October 2023, will restore confidence in the company’s prospects.

Walgreens reported a reasonable quarter and fractionally reduced its full-year 2024 earnings guidance. The company appears to have found a capable CEO with deep and directly applicable industry experience, a sensible bottom-up turnaround approach and the ability to bring in and lead an upgraded talent roster. Walgreens’ turnaround will be slow, measured in years, and not without risk given the highly complex industry changes, but our confidence is sharply increased that a successful turnaround is possible. No change to our rating.

What builds our confidence is that Tim Wentworth, in the CEO seat for only five months, is making many sensible changes to how Walgreens operates. A few indicators: scrapping the expensive and risky built-from-scratch new tech platform launched by the prior CEO, elevating the role of its pharmacists (which in many ways is the only reason Walgreens even exists today) while also helping ease pharmacists’ burden of low-value grunt work, and pushing accountability down to the store level backed by matching changes to the incentive compensation metrics. Wentworth is also refreshing the senior leadership team by elevating some executives and hiring outside talent where needed.

In the quarter, sales in the U.S. Retail Pharmacy segment rose 5%, helped by 9% same-store growth in pharmacy sales that more than offset 4% lower same-store retail (everything but pharmacy) sales. Operating income fell 30% due to a variety of factors that were partly offset by cost cutting. We watch the general trends in sales and profits but recognize that from quarter to quarter, with a company like Walgreens, the short-term noise can be loud.

International sales rose 3% while operating profits fell 32%. The healthy underlying fundamentals of Boots U.K. was offset by noise as well as the accounting effects of Walgreens’ declining stake in Cencora (formerly Amerisource Bergen). While anything is possible, we see a sale of the U.K. Boots business as being pushed out, partly because Walgreens is using this business as a testing ground for navigating complex but generic regulatory matters that can then be applied to the U.S. operations. We anticipate that the Cencora stake will continue to be a source of cash.

The U.S. Healthcare operations produced its first-ever positive EBITDA (at $17 million). This segment’s strategy is under intense management scrutiny. One indicator of progress is that VillageMD is pruning its weakest locations. Walgreens wrote off $5.8 billion of its VillageMD investment, a healthy recognition by management that the company overpaid for this acquisition. Walgreens charged off a total of over $13 billion in goodwill and other assets in the quarter.

The balance sheet remains reasonably liquid and sturdy. Free cash flow as calculated by Walgreens was an outflow of $(610) million – the company needs to start generating positive free cash flow to create a sustainable turnaround.

In the quarter, revenues increased 6% and were 3% above estimates. Adjusted earnings of $1.20/share rose 3% and were above the $0.82 estimate, but it is not clear how comparable the two numbers are.

Thursday, March 28, 2024, Subscribers-Only Podcast:

Covering recent news and analysis for our portfolio companies and other topics relevant to value/contrarian investors.

Today’s podcast is about 9½ minutes and covers:

• Comments on earnings
• Comments on recommended companies
  
  • General Electric (GE) – Completing its three-way split-up next week.
  • Western Digital (WDC) – Shares now within 16% of target after a huge downdraft over the past 2½ years.
• Final note
  
  • Farewell

Please know that I personally own shares of all Cabot Turnaround Letter recommended stocks, including the stocks mentioned in this note.

Portfolio

Disclosure: The chief analyst of the Cabot Turnaround Letter personally holds shares of every Rated recommendation. The chief analyst may purchase securities discussed in the “Purchase Recommendation” section or sell securities discussed in the “Sell Recommendation” section but not before the fourth day after the recommendation has been emailed to subscribers. However, the chief analyst may purchase or sell securities mentioned in other parts of the Cabot Turnaround Letter at any time. Please feel free to share your ideas and suggestions for the podcast and the letter with an email to either me at bruce@cabotwealth.com or to our friendly customer support team at support@cabotwealth.com. Due to the time and space limits we may not be able to cover every topic, but we will work to cover as much as possible or respond by email.

Copyright © 2024. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website. Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.