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Walgreens Rite Aid Merger Might Not Go Through

Stock (Symbol)

Walgreen’s (WBA)

Stock Price

$85

Sector
Food & Necessities
Data is as of
April 20, 2017
Expected to Report
July 5
Company Description
walgreens_manhattanbeachWalgreens Boots Alliance, Inc. (Walgreens Boots Alliance) is a holding company. The Company is a global pharmacy-led, health and wellbeing enterprise. Walgreens Boots Alliance operates through three divisions, including Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale. Source: Thomson Financial
Sharek’s Take
David SharekWalgreen’s Boots Alliance (WBA) and Rite Aid might not achieve approval to merge from the FTC. Walgreen’s has agreed to sell 1200 Rite Aid stores to Freds to get the deal done, but there are rumors the FTC is preparing a lawsuit to block the merger. WBA management expects $1 billion in synergies, but even if the deal doesn’t go through WBA management will have more money to buy back stock, and thus improve profits that way. So to me it doesn’t matter if the merger happens. Walgreen’s boosted profit growth in 2015 and 2016 when it merged with Alliance Boots, but more recently profit growth has slowed to 7% and 4% the last 2 qtrs. On December 31, 2014 Walgreen’s merged with Alliance Boots, which is made up Boots UK, the UK’s leading pharmacy-led health and beauty retailer, and Alliance Healthcare, the largest pharmaceutical wholesaler in the UK. Walgreen’s is a quality company that buys back stock, makes acquisitions, and pays a 2% dividend. It has a good Estimated Long Term Growth Rate of 14% but I don’t know if it can grow that fast. Also, anything having to do with prescription drugs is under pressure as the government has its sights on lowering drug costs (which could curtail profit estimates). Still, this stock is a good buy for long-term investors as it sells for a reasonable 17x earnings.
One Year Chart
Just 4% profit growth last qtr on a 2% decline in sales. Same store sales increased slightly (2%). Currency translation hurt sales. Afterwards, analysts kept annual profit estimates similar to last qtr. Qtrly profits are expected to climb 11%, 13%, 15% and 10% the next 4 qtrs so maybe the stock will tick higher if growth picks up. The P/E of 17 is reasonable.
Fair Value
My Fair Value is 18x earnings which puts the stock at slightly undervalued. There’s decent upside to my 2018 Fair Value of $99 — especially when you factor in dividends. Note this company was having trouble growing earlier in the decade before it merged with Alliance Boots. I feel WBA is a slow grower unless it can keep making acquisitions.
Bottom Line
Walgreens Boots Alliance is a good stock for conservative investors who like the potential for a double-digit grower that pays a nice yield. And with a P/E of 17 the stock is reasonable. But in the end this is a slower growing company than it used to be, and if Walgreen’s does acquire Rite Aid, that will just provide a boost to profits for a couple years. Still, profit growth is looking good for the next 4 qtrs so I feel this stock could make its way higher. WBA ranks 19th of 32 stocks in the Conservative Portfolio Power Rankings.
Power Rankings
Growth Stock Portfolio

N/A

Aggressive Growth Portfolio

N/A

Conservative Stock Portfolio

19 of 32

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