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According to an industry insider, it will become painfully clear to Americans on May 1st.
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Is There a Doctor in the House? Walgreens
It’s been a tough run for shareholders of Walgreens Boots Alliance Inc. (WBA), America’s largest pharmacy chain. The stock has lost 75% of its value since 2016 and generated $5.4 billion in reported pretax losses in fiscal 2023. Analysts expect the firm to notch another $1.1 billion in pretax losses through August, driven by weak profit margins and $500 million of interest expenses.
Much of Walgreens’ problems stem from its debts. In 2018, the firm spent $4.4 billion in cash to buy 1,932 Rite Aid stores. Management then used an additional $4.8 billion in 2023 to buy Summit, a provider of primary, specialty, and urgent care. The combined entity now has $1.1 billion in debts maturing this year, and another $2.2 billion in 2026.
That means falling interest rates could hardly come at a better time. Debt maturities over the next three years represent 40% of Walgreen’s total liabilities, and the firm generates too little cash flow to extinguish these debts. It will either need to refinance them or sell off certain equity investments to make up the difference.
Business is also improving. As Joel Baglole noted in an InvestorPlace.com update this week:
While things look dark for Walgreens, there are some faint glimmers of light starting to shine on the company and its stock. The company has a new CEO named Tim Wentworth who took the helm in October of last year. He has already undertaken a turnaround plan that included cutting the dividend to strengthen the company’s balance sheet and preserve cash.
Additionally, Walgreens’ most recent earnings beat Wall Street forecasts on both the top and bottom lines. The strong print was a reversal for Walgreens, which had missed earnings estimates in the two previous quarters. It will take time, but WBA stock could come back.
Together, that means Walgreens could cut its debt in half by 2026 and generate as much as $2.43 reported earnings per share. Regular earnings per share – which removes one-time charges – could be as high as $3.53. If that happens, a three-stage discounted cash flow model (DCF) tells us Walgreens is worth $60, a stunning 215% upside from today.
High Hopes: Sabre
In February, InvestorPlace.com writer Thomas Niel noted that several Wall Street analysts had suddenly turned positive on Sabre Corp. (SABR), a legacy provider of the back-end technology services to the travel sector.
In its bullish rating, Cantor Fitzgerald cites the strong potential for significant cost savings starting in 2025, new product launches, and the plowing of the resultant increased cash flow into debt reduction efforts all as factors that could send SABR flying high again.
Much like Walgreens, Sabre carries extremely high debts. Its former private equity owners believed its stable business could withstand high interest payments, and so they loaded up the company with almost $4 billion in debts – an enormous sum for a company generating just $500 million in annual operating profits.
The 2020 pandemic proved disastrous for this strategy. A sudden decline in air travel cut Sabre’s revenues by 66% in 2020, sending operating income from $363 million to negative $1 billion. The rise in interest rates in 2022 then blunted the ensuing recovery in travel. In 2023, 90% of Sabre’s $494 million pretax loss came from interest payments.
Fortunately, 2024 is shaping to be a year where both headwinds will turn into tailwinds. Air travel is set to exceed pre-pandemic levels, just as the cost of debt is set to fall. Analysts believe Sabre will eke out positive net income as soon as Q3 this year, and for consistent profits to begin by 2025.
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McKinsey analysts are warning that the tech behind Elon Musk’s new venture could throw 800 million workers worldwide into unemployment.
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Smooth Sailing Ahead: Royal Caribbean and Carnival
Ian Cooper writes about Royal Caribbean Cruises Ltd. (RCL) and Carnival Corp. (CCL) this week at InvestorPlace.com, highlighting that travelers have been booking cruises for 2024 at greater volumes than before 2019. About 35.7 million consumers are expected to cruise this year alone, up from 31.5 million in 2023.
That will greatly benefit the two cruise firms, which, like the two previous picks, carry significant financial debts. Vessels are typically bought on mortgages, and the cruise liners spent roughly half of their operating incomes on debt service last year. That means small changes in revenues can enormously impact the bottom line.
Rising demand and falling interest rates now provide a path to rapid growth. Analysts expect Royal Caribbean’s earnings to surge 48% this year, and for Carnival’s to rise from $0 to $1.3 billion. Both companies should earn double-digit returns on capital invested (ROICs) by 2026.
The recent collapse of Baltimore’s Francis Scott Key Bridge provides a final catalyst for both firms. Shares in both cruise firms temporarily dipped on the media hype, even though the event will have no material impact on their business. Cooper writes:
After rallying from a 2022 low of $6.15 to a recent high of $15.14, [Carnival] is pulling back after failing at double-top resistance. Plus, it did warn that the Baltimore bridge collapse would cut into its profits by about $10 million. Still, CCL is an attractive bet with the overall industry sailing higher.
To put that into perspective, Carnival’s 11% decline since the bridge incident on March 26 wiped out $2.2 billion in market capitalization.
Building Foundations: Opendoor
Finally, Matthew Farley writes this week at InvestorPlace.com about Opendoor Technologies Inc. (OPEN), an “i-buying” firm that makes cash offers for houses and flips them to prospective buyers. He notes that Opendoor has seen substantial gains in 2023 and is now expected to achieve breakeven free cash flow by the first half of 2024.
For 2024, OPEN has set a revenue target between $1.05 billion and $1.1 billion for Q1, with a contribution profit expected to be between $40 million and $50 million. This outlook implies a contribution margin of 3.8% to 4.5%, with an adjusted EBITDA loss projected between $70 million and $80 million.
Thomas Niel also notes, at InvestorPlace.com, that Opendoor’s stock has been bouncing back with a vengeance from “rate cut mania.” The firm carries $2.5 billion in long-term debts to help fund its purchases, so declining interest rates not only boost demand for houses (because cheaper mortgages make housing more affordable for would-be buyers). It cuts expenses for Opendoor as well.
Unfortunately, the firm won't be profitable until at least 2027. Analysts expect mortgage rates to remain above 5% for the next several years, which will create a drag on housing demand. Opendoor’s weak cash flows also reduces its ability to repay debts early, which will prolong the time it takes to become profitable.
Still, declining interest rates are pointing the real estate i-buyer in the right direction. Operating earnings (which ignore interest payments) could turn positive within two years, and the company's leveraged business model means shares have enormous upside if business recovers.
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A radical new A.I. development is about to blindside millions of Americans.
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Click here to see his new video for yourself.
The Investor’s Guide to the Age of Chaos
The five companies here are what you might call “roller-coaster” firms... formerly unprofitable businesses where investors are banking on a recovery. Shares will either rise 5X or more... or go to zero. A single misstep by the Fed could spell chaos for these picks.
In Louis’ latest presentation, he notes that this chaos could easily spread, especially with the presidential election happening concurrently.
That’s why you should join him and a special guest for the Election Shock Summit on Wednesday, April 10, at 8 p.m. During that event, they’ll share their thoughts on the Fed’s rate cut schedule (they disagree), the election, what to do with your money now, and much more. Go here to reserve your spot.
Regards,
Thomas Yeung, CFA
Markets Analyst, InvestorPlace.com
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