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Walgreen Boots Buyout of Rite Aid Delayed, Other Woes Remain

Zacks Equity Research

On Mar 24, we issued an updated research report on Illinois-based leading pharmacy-led, health and wellbeing enterprise,Walgreens Boots Alliance, Inc. WBA.

Ahead of its Q2 earnings, Walgreens Boots is trading above the Zacks classified Retail-Drug Stores industry, over the last three months. Its revenue performance in the last reported first-quarter fiscal 2017 was below the mark.

However, management is optimistic about registering strong growth in the second half of 2017 on new strategic pharmacy tie-ups. Narrowed 2017 earnings outlook also buoys optimism. The stock has so far lost 1.5%, narrower than the 2.84% decline of the broader industry.

Walgreens Boots Alliance, Inc. Price


Walgreens Boots Alliance, Inc. Price | Walgreens Boots Alliance, Inc. Quote

However, FTC–imposed regulatory issues delaying the completion of the long-awaited Rite Aid acquisition raises concern.

In this regard, we note that over the last three months, a comparative study of the company’s forward P/E (F12M basis) multiple reflected that the stock is quite overvalued. The multiple currently stands at 15.41, a bit stretched when compared with its own range (median of 15.83). Moreover, when compared with the broader industry, the comparison is unfavorable, as the current P/E (F12M basis) for the industry is 13.8. We believe the company’s new strategic pharmacy tie-ups and several recent strategic programs including skin product launch and vaccination program will keep the valuation stretched for some time.

Meanwhile, gradual slowdown in generic introduction, increased reimbursement pressure and generic drug cost inflation has been hampering the company’s margin significantly. In the last concluded quarter, Walgreens Boots’ gross margin declined, in line with management’s expectations. The company also continues to witness lower profitability in Boots UK comparable pharmacy due to weak margins in the U.K. However, the company is working toward increasing efficiency and providing high quality and cost-effective pharmacy services, in order to reduce overall pharmacy costs.

Also, Walgreens Boots faces obstacles in the form of increased competition and tough industry conditions. Though the company continues to gain market share from other traditional drug store retailers, major mass merchants such as Target and Wal-Mart are expanding their pharmacy businesses, posing competition. There are also risks from other channels such as supermarkets and mail order operations. In addition, industry conditions remain challenging as insurers slash reimbursement rates and raise prescription co-payments.

Other issues such as currency fluctuations, weak macroeconomic environment along with delay of Rite Aid buyout also raise concerns.

Zacks Rank & Key Picks

Walgreens Boots currently has a Zacks Rank #4 (Sell). Better-ranked stocks in the medical product sector include Inogen, Inc. INGN, Bovie Medical Corporation BVX and ResMed, Inc. RMD. While Inogen sports a Zacks Rank #1 (Strong Buy), Bovie and ResMed carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Inogen gained 84.8% in the last one year compared with the S&P 500’s gain of 15.1%. The company has a stellar four-quarter positive average earnings surprise of over 49.08%.

Bovie Medical surged 55.9% in the last one year compared with the S&P 500. It has a four-quarter positive average earnings surprise of 28.7%.

ResMed gained over 25.5% in the past one year, better than the S&P 500 mark. It also has a trailing positive average earnings surprise of 0.31%.

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