A first look at Walgreens Boots Alliance and Advance Auto Parts

I've said previously that Walgreens Boots Alliance (WBA) and Advance Auto Parts (AAP) have two of the "ugliest stock charts you'll ever see"...

In Friday's e-mail, I shared the long-term stock charts of those two companies – along with one of chip giant Intel (INTC), which was another terrible chart – and the massive declines are painful to look at:

However, as I said on Friday:

Few things get my value-investor heart racing more than stocks trading at 52-week lows – but one of them is stocks trading at levels not seen for one, two, or even three decades.

And as I also noted:

I've sometimes found incredible opportunities among the most hated, beaten-down stocks... but generally only when many (ideally all) of the following conditions are true:

• Modest (rather than catastrophic) declines in revenue and net income...
• Even if it's declining, positive (or at least not too negative) free cash flow (operating cash flow minus capital expenditures, or "capex")...
• A decent balance sheet, which gives a company time to right itself...
• A good sector (a reasonably competitive environment in which other companies are doing well)...
• And new management.

So, later in that e-mail and in Monday's, I analyzed Intel's historical financials and concluded that they were so weak – and that the company didn't pass the first three of my conditions above – that I wasn't interested in pursuing Intel as a stock idea any further.

So today, let's do another "first look" into the historical financials for Walgreens and Advance to see whether these stocks are worth a deeper dive...

Regarding the former, as always, I like to start by analyzing revenues and profits over the past 20 years:

We can see that Walgreens earned about $2 billion annually, which doubled in 2015 thanks to the 2014 acquisition of the remaining 55% of pharmacy chain Boots that it didn't own.

After a dip in 2020 and 2021 due to the pandemic, profits recovered to $4.3 billion in 2022 – but since then have fallen off a cliff to a degree that I have rarely ever seen. Over the past 12 months, Walgreens has lost a staggering $5.8 billion.

Ah, but might those losses be due to noncash charges? To answer this, let's look at the company's cash-flow statement with cash from operations, capex, and free cash flow ("FCF"):

There's good news and bad news here...

Sure enough, FCF isn't nearly as bad as net income because the latter was hit by a $5.8 billion noncash goodwill impairment charge related to VillageMD – a massive write-down of the value of Walgreens' investment in the primary care chain.

But even setting this aside, Walgreens has seen a precipitous decline in FCF from $4.2 billion in 2021, to half that in 2022, to zero last year, to negative $894 million over the past 12 months.

Making this even more problematic is Walgreens' weak balance sheet:

We can see that Walgreens had almost no net debt until it took on nearly $10 billion to acquire Boots. Net debt then soared to $40.2 billion in 2020... and today sits at about $33 billion.

That's an alarming amount of debt for a company that only has a roughly $7.5 billion market cap. No wonder credit-ratings agencies Moody's and S&P recently downgraded it to near-junk status – specifically to BBB-, which is the lowest rung of investment grade.

Bond investors think it's possible that Walgreens goes bankrupt, and I agree... so I wouldn't be interested in bottom-fishing the stock at these levels.

But what about Advance?

To start, let's look at the company's revenues and profits over the past two decades:

This looks a bit like Walgreens – a steady grower, with a pop in 2014 due to the acquisition of automotive-parts distribution network Carquest, and then profits dropped off a cliff starting in 2022 and accelerating in 2023 – though it's only barely unprofitable, with a mere $298 million loss over the past 12 months.

Next, Here's what Advance's cash-flow statement looks like:

As you can see, Advance's FCF fell sharply in recent years – bottoming at about $45 million in 2023 – but rebounded in the first two quarters this year, aided by a cut in capex. That said, FCF still remains below where it was 15 years ago.

Last up is Advance's net debt:

Advance acquired Carquest in late 2013 for approximately $2 billion in cash, taking it from a small net cash position to $1.6 billion of net debt in 2014. The company then paid down debt to almost zero in 2018, but it soared to nearly $3 billion in 2019 because of the new accounting requirement to capitalize leases... and it has risen from there to about $4 billion today.

This is high. But unlike that of Walgreens, it isn't an alarming amount of debt – especially since most of it is leases.

In summary, Walgreens' financials are so precarious that I'm not interested in the stock any further.

On the other hand, Advance is interesting for a number of reasons. And its financial picture, while weak, isn't disqualifying... so stay tuned for my closer look at it!

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.