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Choosing Between Walgreens Boots Alliance, Inc. (WBA) and GameStop Corp. (GME)

Walgreens Boots Alliance, Inc. (NASDAQ:WBA) shares are down more than -12.12% this year and recently decreased -0.34% or -$0.22 to settle at $63.82. GameStop Corp. (NYSE:GME), on the other hand, is down -24.18% year to date as of 04/13/2018. It currently trades at $13.61 and has returned 1.34% during the past week.

Walgreens Boots Alliance, Inc. (NASDAQ:WBA) and GameStop Corp. (NYSE:GME) are the two most active stocks in the Pharmaceutical Retailers industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect WBA to grow earnings at a 11.82% annual rate over the next 5 years. Comparatively, GME is expected to grow at a 12.00% annual rate. All else equal, GME’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 3.13% for GameStop Corp. (GME). WBA’s ROI is 11.90% while GME has a ROI of 4.40%. The interpretation is that WBA’s business generates a higher return on investment than GME’s.

Cash Flow



The amount of free cash flow available to investors is ultimately what determines the value of a stock. WBA’s free cash flow (“FCF”) per share for the trailing twelve months was +1.53. Comparatively, GME’s free cash flow per share was +3.80. On a percent-of-sales basis, WBA’s free cash flow was 1.28% while GME converted 4.17% of its revenues into cash flow. This means that, for a given level of sales, GME is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. WBA has a current ratio of 0.90 compared to 1.30 for GME. This means that GME can more easily cover its most immediate liabilities over the next twelve months. WBA’s debt-to-equity ratio is 0.57 versus a D/E of 0.00 for GME. WBA is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

WBA trades at a forward P/E of 9.86, a P/B of 2.31, and a P/S of 0.51, compared to a forward P/E of 4.73, a P/B of 0.62, and a P/S of 0.15 for GME. WBA is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. WBA is currently priced at a -22.72% to its one-year price target of 82.58. Comparatively, GME is -12.53% relative to its price target of 15.56. This suggests that WBA is the better investment over the next year.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. WBA has a beta of 1.15 and GME’s beta is 1.28. WBA’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. WBA has a short ratio of 3.29 compared to a short interest of 7.50 for GME. This implies that the market is currently less bearish on the outlook for WBA.

Summary

GameStop Corp. (NYSE:GME) beats Walgreens Boots Alliance, Inc. (NASDAQ:WBA) on a total of 8 of the 14 factors compared between the two stocks. GME is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, GME is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, LUK has better sentiment signals based on short interest.

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