Investors and analysts who are interested in drugstores and retail stocks will likely be keeping an eye on Walgreens Boots Alliance (ticker: WBA) this week in hopes of an update on its ever-dragging will-it-or-won’t-it merger with No. 3 player, Rite Aid Corp. ( RAD).
And while they might walk away disappointed, this week’s quarterly earnings statement should give investors some comfort that WBA stock will be just fine, regardless of how the Rite Aid merger plays out.
The headline numbers. While the Rite Aid merger continues to be a hotbed of uncertainty, that hasn’t affected actual operations of Walgreens, the country’s second-largest drug store chain by revenues.
Fiscal second-quarter earnings that are being reported on Wednesday are expected to be a little on the lean side — Wall Street believes WBA will grow earnings 3.8 percent to $1.36 per share on revenues that will inch higher by 10 basis points to $30.22 billion. However, that looks more like a speed bump amid a more promising full-year 2017 in which Wall Street expects a bottom-line improvement of 9 percent to a flat $5 per share on a 1.5 percent uptick to $119 billion on the top line.
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If you want to look that far ahead, 2018 is even sunnier, with analysts expecting 10.6 percent profit growth on 4.4 percent sales improvement.
One big expected driver for Walgreens’ business was a deal announced in December 2016 by the Department of Defense’s health care program Tricare — and that deal did not include rival CVS Health Corp. ( CVS).
Walgreens did not disclose what exactly the arrangement would mean in terms of business clawed away from CVS, but we received at least a hint a month earlier from a CVS Health announcement. Specifically, CVS in its Q3 release warned about a “loss of more than 40 million retail prescriptions related to new restricted pharmacy networks.” That resulted in CVS shares plunging roughly 12 percent in a single day.
Regardless, it should be a boon for Walgreens, and at least one analyst agrees. Baird’s Eric Coldwell updated its outlook on WBA stock recently, which included a hike to earnings estimates from $1.30 per share to $1.36, in part because of the Tricare start. However, the company’s expectations for $29.7 billion in revenues is actually below the Street consensus.
Instead, Baird’s bullishness is on the second half of the year. “In addition to Tricare, OptumRx 90-day at retail and Prime preferred network agreements (Prime specialty pharmacy combination still to come) should layer into results,” Coldwell says.
Let’s make a deal? On the Rite Aid front, Walgreens provided us with one of the juicier bits of deal-related info that we can expect for a while: Namely, WBA has “started the clock.”
The New York Post reported on Friday that Walgreens set a deadline of three months for the Federal Trade Commission to either approve the deal or block it. It’s a mostly political gambit on the part of WBA, with the drugstore chain betting that President Donald Trump will install a friendly face as head of the FTC by the time the deadline has passed.
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And, as the Post pointed out, “such declarations of so-called ‘certified compliance’ … also prevent the commission from ruling well ahead of the deadline.” In other words, Walgreens has already drawn a line in the sand, and it’s unlikely the FTC will rule while WBA is reporting earnings, so additional deal news might be thin and awfully repetitive.
But optimism over a deal is fading, with RAD shares down by nearly half year-to-date amid growing fears that the delays will result in a failure. It hasn’t been for a lack of trying, either — Walgreens in late January said it would divest more stores than the original 865 Rite Aid locations it planned to hand over to Tennessee-based Fred’s ( FRED). In the same announcement, Walgreens said it would pay at least $2 less per share of RAD stock than its original $9 offer.
Baird assumed 1,200 store divestitures in its note, in which it still believed the deal would close, but not until Aug. 1. That came out just days before Walgreens’ timetable announcement, however. For now, Baird is assuming no earnings accretion for this year even if the RAD deal does go through, and cut 2018 estimates in half.
More Earnings in Focus
Monsanto Co. (MON). Monsanto, like Walgreens, reports fiscal second-quarter earnings before Wednesday’s bell, and like Walgreens, everyone is far more interested in whether a pending merger will go through. In this case, MON is the prey, and German chemical and health care conglomerate Bayer AG is the hunter. While Bayer began to court Monsanto in May, the two didn’t agree to a $66 billion merger until September 2016. That also faces regulatory scrutiny; however, Bayer is plying President Donald Trump with big spending and job creation in the U.S. For the record, Wall Street expects a decent quarter out of Monsanto — 4.3 percent top-line growth to $4.73 billion, and 15 percent bottom-line growth to $2.79 per share.
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Bed Bath & Beyond (BBBY). Home decor seller Bed Bath & Beyond continues to be caught in a multiyear slump. Shares are off more than 50 percent from all-time highs in early 2015 — a likely driver behind BBBY initiating a 12.5-cent quarterly dividend roughly a year ago. However, if Bed Bath really is committed to keeping value and income investors interested, this quarter’s earnings report on Wednesday will have to include a hike to that regular payout, which it can afford given a single-digit payout ratio. On the earnings front, analysts expect the same weakness out of BBBY that has been plaguing the retail industry — sales growth of just 2.5 percent to $3.42 billion, and a 7.3 percent contraction in profits to $1.77 per share.
This Week’s Earnings Calendar
Tuesday. Conn’s ( CONN)
Wednesday. Yum China Holdings ( YUMC)
Thursday. CarMax ( KMX), Constellation Brands ( STZ), PriceSmart ( PSMT), WD-40 Co. ( WDFC)
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Walgreens Boots Alliance (WBA) Will Be Fine, Rite Aid or Not originally appeared on usnews.com
