Walgreens Boots Alliance, Inc. WBA is gaining from a slew of product launches and partnerships. The company exited third-quarter fiscal 2021 with better-than-expected results. Strength in the International segment buoys optimism. The accelerated investment in VillageMD instills investor confidence. However, weak solvency scenarios and stiff competition do not bode well for the stock.
Over the past year, the Zacks Rank #3 (Hold) stock has gained 35.3% compared with 40.8% growth of the industry and a 36.9% rise of the S&P 500.
The renowned pharmacy-led, health and well-being enterprise, has a market capitalization of $41.87 billion. Its earnings for third-quarter fiscal 2021 surpassed the Zacks Consensus Estimate by 24.3%.
Over the past five years, the company registered earnings growth of 3.9% compared with the industry’s 6.4% rise and the S&P 500’s 2.8% increase. The company’s long-term projected growth of 6.9% compares with the industry’s growth projection of 6.6% and the S&P 500’s expectation of 11.2% growth.
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Let’s delve deeper.
Factors At Play
Q3 Upsides: Walgreens Boots exited third-quarter fiscal 2021 with better-than-expected earnings and revenues. Strong growth in the International segment, aided by the formation of the company's joint venture in Germany, coupled with solid growth in the United States segment is encouraging. The robust sales of Boots.com instill investor confidence. The rapid adoption of the Walgreens Find Care platform is an added advantage. The company has raised its 2021 guidance, which is indicative of the bullish trend to continue.
Strategic Alliances: Walgreens Boots’ notable partnerships with Verizon in the United States, Genpact and Kroger raise our optimism. In March 2021, Walgreens Boots, partnered with InComm Payments to launch a bank account for its customers at MetaBank with a Mastercard debit card.
In its update for March, the company confirmed the collaboration with Nuance to introduce COVID-19 vaccination bookings on its MyWalgreens app. Meanwhile, the portion of net proceeds from the sale of the company’s Alliance Healthcare businesses to AmerisourceBergen in June 2021 will be used to fund the company’s previously announced initiatives. The initiatives involve investment in VillageMD as well as the company’s acquisition of a majority stake in iA.
Product Launches: We are upbeat about Walgreens Boots’ slew of product launches in the past few months. In April 2021, the company launched the No7 Beauty Company. In third-quarter fiscal 2021, the company launched Boots ONLINE DOCTOR, as part of the Health Hub. In the fiscal second quarter, the company launched a business-to-business service called Test & Protect and announced the nationwide rollout of same-day delivery with Instacart.
Continued Pressure on Margin: Walgreens Boots’ margins have been impacted by a slowdown in the generic introduction in past few years. Of late, the company’s margin has significantly been hampered by increased reimbursement pressure and generic drug cost inflation.
Weak Solvency: Walgreens Boots exited third-quarter fiscal 2021 with cash and cash equivalents of $1.35 billion compared with $1.03 billion recorded at the end of the second quarter of fiscal 2021. The total debt stood at $15.70 billion at the end of the quarter under review. Further, the current-year payable debt of $7.96 billion exceeded the short-term cash level. This is particularly concerning in terms of the company's solvency since during a period of economic downturn, the company does not have enough cash on hand to repay short-term debt.
Competition: Walgreens Boots competes with notable drug store retailers like CVS Health CVS. Following the termination of the Walgreens-Express Scripts contract, CVS Caremark’s retail division witnessed a record market share gain. While Walgreens Boots’ sluggish performance is improving with the return of consumers, CVS management’s commentary on retaining a majority of the client wins raises concern.
Walgreens Boots has been witnessing a positive estimate revision trend for 2021. Over the past 90 days, the Zacks Consensus Estimate for its earnings has moved 0.2% north to $4.75.
The Zacks Consensus Estimate for fourth-quarter fiscal 2021 revenues is pegged at $33.18 billion, suggesting a 4.49% fall from the year-ago reported number.
Two better-ranked stocks from the broader medical space are IDEXX Laboratories, Inc. IDXX and Envista Holdings Corporation NVST, each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
IDEXX has a long-term earnings growth rate of 19.9%.
Envista Holdings has a long-term earnings growth rate of 27.4%.
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