When Walgreens Boots Alliance Inc (NYSE: WBA) replaced General Electric Co. ( GE) in June in the Dow Jones industrial average, much of the media attention focused squarely on GE’s ouster — and not much on the choose of Walgreens to be one of 30 components to make up the high-profile Dow index.
But the Deerfield, Illinois-based company is an interesting choice at a time when the entire retail drugstore industry is facing a big challenge from Dow giants like Amazon.com ( AMZN) and Walmart ( WMT).
WBA stock at a glance. Walgreens Boots Alliance (the company’s official name since 2014) operates more than 13,200 stores in 111 countries, employing 385,000 people. In the U.S., WBA owns the high-profile Walgreens and Duane Reade banners, and it also recently bought 1,932 Rite Aid stores for $4.38 billion. Outside the U.S., WBA operates under the Boots banner.
Overall in 2017, Walgreens rang up $87.3 billion in sales for its retail pharmacy USA segment and raked in $11.8 billion in sales from its retail pharmacy international operations.
Of 25 professional market watchers who follow WBA stock, 12 analysts deem Walgreens a “buy,” and 13 call it a “hold,” with a combined consensus one-year target price of $80 per share.
The stock is currently trading about $67 per share, near the midpoint of its 52-week high and low. It took a big hit in late June when Amazon announced it will purchase PillPack, an online pharmacy company that is licensed to ship prescriptions in all 50 states. But since June 28 WBA stock has been on a rally, up 12 percent to recover those losses.
Pros to buying WBA stock. Analysts expect Walgreens to post positive gains for the rest of 2018 and into 2019 .
In a June 22 research note, J.P. Morgan’s Lisa Gill pegged WBA stock for a 13 percent increase in year-over-year revenue, at $34 billion, a call that was right on the mark after Walgreens announced its third-quarter earnings. Particularly strong was WBA’s Retail Pharmacy USA division, which recorded $25.9 billion, a 15 percent year-over-year increase, which accounted for 75 percent of the company’s third-quarter sales.
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Those numbers offer intrigue to professional investors — but as always, there are caveats.
“Clearly, Walgreens is a high-quality company and is a leader in its industry and across the pharmaceutical supply chain,” says Alan Ahmatovic, portfolio administrator for Apriem Advisors, a wealth management firm in southern California. “The recent acquisition of Rite Aid and partnership with the distributor, Amerisource Bergeron, have solidified its foothold in the industry.”
Despite a current robust balance sheet and strong cash flows, the company’s financial position is in question, as margins are being squeezed due to increased competition and reduced pricing power across suppliers and consumers, Ahmatovic says.
“To combat these issues, Walgreens has put a greater emphasis on growing sales for non-pharmaceutical products and has pushed for inclusion in more pharmacy benefit manager networks by offering discounts on generic drugs,” he says. “Walgreens’ strong brand name and increased scale through acquisitions should help drive these initiatives in the long term, but it is uncertain when these benefits will be realized.”
According to Morningstar, Walgreens accounted for one-fifth of total U.S. prescriptions in 2017. “Consequently, despite the shakeups in industry dynamics driving short-term volatility in profits, expect Walgreens to survive and reposition as needed,” Ahmatovic says.
Cons to buying WBA stock. Walgreens joins the Dow Jones industrial average at an interesting time, Wall Street insiders say.
“It’s definitely in the cross-hairs of Jeff Bezos and Amazon,” says Robert R. Johnson, principal at the Fed Policy Investment Research Group. “Bezos was once quoted as saying ‘your margin is my opportunity.’ He sees tremendous opportunity in disrupting the pharmacy sector.”
That’s one reason why the shares of major drug store companies — Walgreens, Rite Aid Corp. ( RAD) and CVS Health Corp. ( CVS) plunged on news of the PillPack announcement, he says.
One key financial area that Johnson likes is WBA’s stable dividend — for now. “Walgreens has historically been one of those companies that have been able to consistently grow its dividends,” Johnson says. “In fact, it has done so for 43 consecutive years.
“The dividend seems very safe, at least in the near term, but the disruption in the industry will likely put pressure on Walgreens’ margins,” Johnson says. “Even with a consensus forward P/E of a little over 10 times, investors can find better values in other sectors.”
That creates some negative sentiment for Walgreens stock.
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“As a long-term value investor, Walgreens may be a good fit, based on its historically low valuation and strong dividend yield,” Ahmatovic says. “Given some time, Walgreens may be able to achieve a competitive level of sustainable growth through its acquisition of Rite Aid and growing participation in pharmacy benefit networks. Even if pricing power for generic drugs continues to remain low, the sheer growth in volume coupled with an aging baby boomer generation may help drive profitability.”
Walgreens may wind up in an industry scenario with “too much duplication” says Mike Molitoris, a money manager at Flagship Wealth Management Group, in Cary, North Carolina.
“What it is going to come down to is the service experience and scalability,” Molitoris says. “Can Amazon build enough scale to undercut its competitors and bring in income?
“To be honest this space scares me,” he adds. “Target ( TGT) was wise several years ago to unload their pharmacies to CVS and get out of that game. With the largest segment of the American population getting ready to go on Medicare, I think this makes perfect sense for Amazon, and ultimately feel like Walgreens and others will suffer from their entry into this sector.”
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The bottom line. Given the short-term uncertainty surrounding the industry and continued residual impact of competition from Amazon, the immediate future for WBA isn’t so promising.
“The stock will most likely continue to exhibit volatility and could fall lower from here,” Ahmatovic says, “which would lead momentum investors and short-term traders to lean elsewhere for opportunities.”
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Pros and Cons to Buying Walgreens Boots Alliance Inc (WBA) Stock originally appeared on usnews.com
