Walgreen Boots: Mixed Q4, Awaits Rite Aid Deal Closure

On Nov 25, 2016, we issued an updated research report on Deerfield, IL-based Walgreens Boots Alliance, Inc. (NASDAQ:WBA) , which is the world’s first pharmacy-led, health and wellbeing enterprise. The company currently carries a Zacks Rank #3 (Hold).

Walgreens Boots reported mixed fourth-quarter fiscal 2016 results, with earnings comfortably beating the Zacks Consensus Estimate while revenues fell just shy of the mark. The postponement of the proposed Rite Aid buyout in relation to some required divestments at Walgreens and Rite Aid stores also adds to concerns.

However, the company’s share price movement has remained robust since the last earnings release. Walgreens gained 2.05% over the past one month, a significant outperformance compared to the industry growth rate of -4.6%.

Nonetheless, we are currently looking forward to the closure of the deal as the combination of these two retail giants will allow Walgreens Boots to further expand its business realm in the U.S. − where it already enjoys the position of the largest retail drug store giant − in the long term.

Management expects this buyout to accelerate Walgreens Boots’ strategy by completing its network; providing a larger and more comprehensive portfolio, with which it will deploy additional knowledge and skill; creating a more comprehensive and strong platform for the development of the company’s brand presence and overall future growth of its business.

We also note that so far, the strategic combination of Walgreens and Alliance Boots which formed Walgreens Boots, has made healthy progress in its operations, as evident from the strong fiscal fourth-quarter results. Comparable pharmacy sales were up 0.6% at Boots UK.

Earlier, Walgreens Boots witnessed considerable progress in driving sales of its No7 beauty brand, acquired through the Alliance Boots deal. In this regard, the company is on track to expand its differentiated beauty product offering to an additional 1800 stores. This will increase the total number of stores with its beauty product offerings to approximately 2000 by the end of calendar year 2016.

The company’s strong cash balance position and progress of its cost-cutting initiatives further boost our confidence in the stock.

On the flip side, fewer generic drug introductions and the ongoing generic drug inflation have been hindering Walgreens Boots’ pharmacy margin. In the fiscal fourth quarter as well, the company’s pharmacy gross margin figures contracted, in line with management’s expectation due to ongoing reimbursement pressure and changes in mix.

Stocks to Consider

Better-ranked stocks in the broader healthcare sector are NxStage Medical Inc. (NASDAQ:NXTM) , Baxter International Inc. (NYSE:BAX) and Bovie Medical Corporation (NYSE:BVX) . NxStage Medical and Baxter International sport a Zacks Rank #1 (Strong Buy), while Bovie Medical carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

NxStage Medical surged 32.2% in the last one year compared to the S&P 500’s 5.9% over the same period. The company has a four-quarter average positive earnings surprise of 46.25%.

Baxter International rallied 23.9% over one year, much higher than the S&P 500’s 5.9%. It has a trailing four-quarter average positive earnings surprise of 27.02%.

Bovie Medical recorded a 119.39% gain in the past one year, way better than the S&P 500’s 5.9%. The company has a trailing four-quarter average positive earnings surprise of 28.69%.

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