Walgreens Boots Alliance, Inc. (WBA) Stock is a retail drugstore chain, selling both prescription and non-prescription drugs, as well as general merchandise products. The company will publish its earnings report on April 5 before the opening bell.
WBA’s stock has been getting a lot of controversial reviews recently. Company’s overall performance outpaced the industry in the last fiscal quarter, yet certain factors can hinder its growth or even reverse the positive trend in the near future.
Whether it is worth investing in WBA or not, we will know after a closer look.
Financial estimates
Certain estimates can be made based on the financial performance of the company. Compared to the Retail — Pharmacies and Drug Stores industry WBA is doing considerably better, however, its revenue in the last reported fiscal quarter was below average. Top management tries to maintain company’s reputation by pointing to positive prospects for the second half of 2017.
Judging by the forward P/E multiple WBA’s stock is slightly overvalued. The current value of the multiple is equal to 15.41, which is stretched compared to both company’s median of 15.83 and the current P/E ratio for the industry, which is 13.8. Still, the valuation is believed to remain stretched for quite some time thanks to new strategic programs and tie-ups of the company.
The consensus EPS for the quarter is $1.36, which is slightly higher that the reported EPS for the same quarter last year ($1.31).
Rite Aid acquisition
Rite Aid acquisition, initiated in October 2015, is still not finished. Some experts believe the beneficiary of this deal is Fred’s Inc. — WBA’s prime competitor. In accordance with antitrust legislation, Walgreens was told to sell more than originally proposed 865 stores. Not only additional stores but distribution centers, software, and personnel are also at stake. This will help Fred’s expand its pharmacy business. This news has been followed by investors’ bullish sentiment and almost 4% share price spike. It is known that the trade union, representing six thousand Rite Aid workers, was against the potential sale of drug-stores to Fred’s Inc.
FTC-imposed regulations cause investors to believe that the Rite Aid acquisition is far from being complete. According to WBA’s initial plans, the deal must have been closed in the second half of 2016 but the U.S. Federal Trade Commission clearly didn’t think it was possible.
Issues to consider
Gradual slowdown in generic introduction, increased reimbursement pressure and drug cost inflation affected the company’s margin significantly, and not in a positive way. In the last reported quarter Walgreens’ gross margin shrank. Boots UK, the WBA’s British subsidiary, suffers from lowered profitability (and again due to weak margins). This problem can be solved in the near future by a number of initiatives, launched by the company. High quality and cost-effective pharmacy services can be one of the expected results.
Tough industry conditions and increased competition can become a stern problem. Though the company is successfully eating up the market share of other traditional drugstore chains, the blow may come from an unexpected direction. Target and Walmart dedicate a substantial part of their resources to pharmacy sales. The competition, though, is not limited to well-known mass merchants. Supermarkets and even mail order companies take a closer look at pharmacy business opportunities.
Macroeconomic events and currency fluctuations can have a negative influence on drug-store chain operations.
Rising competition
The company is expected to face some serious pressure from both traditional and newly arising competitors. One of them has already been mentioned in this article — it is Fred’s Inc., that has all the chances of becoming the real winner of the Rite Aid acquisition. However, this is possibly not the major concern WBA should consider. Amazon is working on bypassing traditional retail channels, selling goods directly off the website and delivering them to the consumer’s door.
Risk assessment
According to RiskGrades, Walgreens’ stocks belong to the category of relatively low-risk assets. It means that in the long-run any major disruptions in company’s financial performance are not expected. It should be noted, however, that options and other derivatives are still considered to be a risky investment.
Conclusion
There are several factors to consider before investing in Walgreens. WBA’s shares outperformed the Retail — Drugstore industry, but could not get close to the broader Retail industry indicators in the year-to-date period. The Rite Aid acquisition is not a solved issue and can negatively affect the stock prices of both companies. On the other hand, the expected EPS and high dividends make WBA stocks a lucrative option.
The outlook for the company is moderate to positive, which doesn’t necessary mean that the stock prices will rise once the earnings report is revealed. The opposite situation might very well be possible. The are enough factor that can trigger both increase and decrease in WBA stock prices.
