Is Walgreens Boots Alliance stock a buy?

As the great investor Peter Lynch once suggested, investing in companies that you know well and interact with every day can be a great way to gain an edge and profit. But that doesn’t mean you should invest each the company you know well.

On this note, Walgreens Boots Alliance (WBA 4.19%) it’s a business that many of us have been customers of, and often for many years. However, it’s probably not the best choice for investors who prefer a standard buy-and-hold-forever approach. With that in mind, let’s examine the stock and assess who it might be right for and why.

Who could this stock appeal to?

While Walgreens’ evergreen business model of operating retail pharmacies may make it seem like a safe stock to buy for those approaching retirement, in reality, this company is not fit for purpose. Nor is it a great choice for long-term holding; over the last 10 years, its total stock return was -76%.

But there are a couple of investment styles that might find this stock worth a look. In particular, deep value investors and those who prefer to invest in potential turnaround plays may see an opportunity here. Here’s why.

Over the past five years, Walgreens’ trailing-12-month operating income has plummeted to a loss of more than $1.4 billion in the past four quarters. Management points to consumers having less spending power to explain the decline and also headwinds to the pharmacy industry as a whole stemming from difficulties securing reimbursement from insurers.

Over the same period, its total quarterly assets fell 8.6% to just under $83 billion. In other words, to cover the gap between necessary expenses and operating losses, it depletes its cash reserves and sells its assets.

For example, on August 1, he sold $1.1 billion of his stock Cencoraof his common stock, reducing his stake to about 10%. The proceeds went toward paying down a portion of the company’s long-term debt as well as its capital lease liabilities, which together totaled nearly $28.8 billion in fiscal Q3.

So this business is heavily indebted, struggling to make its operations profitable again, and shrinking, both in ways that won’t actually affect its ability to generate revenue, such as selling its equity positions, and in ways that will, such as closing stores. There is a clear risk that it will go bankrupt if it cannot improve its operational efficiency in the long term. And this is where it starts to look like it could be a comeback play.

It’s no secret that Walgreens has a massive retail pharmacy footprint, as well as a legion of trained pharmacists and staff, not to mention many millions of customers. At least some of these customers have no other option to fill their prescriptions, so they’re stuck, which means there’s an economic moat. Therefore, the company has a large amount of genuine value, even if it is currently liquidating that value to stay afloat.

The question is how long will it have to bail out before it stabilizes its operations and reduces its debt to a manageable level? A decent estimate is that it will take at least a few years to stem operating losses, but debt relief may be a longer-term project than most investors would prefer.

There is no rush to make a decision here

In the long term, it is feasible that by reducing its most unprofitable locations and services and streamlining existing locations and services, Walgreens will return to consistent operating profitability. And that could provide a decent return for those who buy its shares now, when things look bleak and when stocks look incredibly cheap.

For reference, its price-to-sales (P/S) multiple is currently just 0.05, while its price-to-book (P/B) ratio is just 0.55. Its valuation ratios put the stock’s valuation firmly in the bargain bin. But like many of the products we find in the bargain bin, its usefulness (as an investment) is debatable and rather dubious at this point. Remember, the company’s value will almost certainly continue to decline for at least a little while longer, dragging down its stock in the process.

So what is the approach here?

Even if you’re the type to typically invest in deep value stocks or volatile recovery plays, the smart move is to wait a little while longer until evidence of an operational recovery starts to accumulate. Look for at least two consecutive quarters of growing operating profits that cannot be explained by seasonal factors or other temporary phenomena.

Until that happens — and it could be years, and it may never happen — Walgreens stock is not a buy for anyone right now.