Zacks Walgreen Co (2)

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<ul><li><p> 2014 Zacks Investment Research, All Rights reserved.</p><p>111 North Canal Street, Chicago IL 60606 </p><p>Walgreen Co (WAG-NYSE) SUMMARY </p><p>SUMMARY DATA </p><p>Risk Level * Below Avg., Type of Stock Large-Blend Industry Retail-Drug Str Zacks Industry Rank * 40 out of 267 </p><p>Current Recommendation NEUTRAL</p><p>Prior Recommendation Outperform Date of Last Change 03/13/2011 </p><p>Current Price (04/24/14) $67.42 Target Price $71.00 </p><p>Walgreens reported a mixed second quarter fiscal 2014 with adjusted earnings remaining below the Zacks Consensus Estimate while revenues exceeding the mark. As expected, Walgreens recorded improved revenues during the quarter on plump prescription sales. The company returned to sales growth with increasing return of Express Scripts customers following the resolution of their earlier impasse. However, sluggish front-end sales and difficult macroeconomic conditions remained looming concerns. Nonetheless, Walgreens gained a modest share in the retail pharmacy market. The higher first-year synergy from the Alliance Boots deal was another upside. We are also upbeat about the long-term three-pronged-deal with AmerisourceBergen. However, Walgreens strategy to win back earlier clients is still to be proven. The competitive landscape also remains tough. Accordingly, we remain Neutral on Walgreens. </p><p>52-Week High $69.09 52-Week Low $44.12 One-Year Return (%) 37.52 Beta 1.34 Average Daily Volume (sh) 6,221,896 </p><p>Shares Outstanding (mil) 950 Market Capitalization ($mil) $64,061 Short Interest Ratio (days) 3.55 Institutional Ownership (%) 65 Insider Ownership (%) 8 </p><p>Annual Cash Dividend $1.26 Dividend Yield (%) 1.87 </p><p>5-Yr. Historical Growth Rates </p><p> Sales (%) 3.2 Earnings Per Share (%) 10.2 Dividend (%) 24.2 </p><p>P/E using TTM EPS 21.0 </p><p>P/E using 2014 Estimate 19.5 P/E using 2015 Estimate 17.3 </p><p>Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page</p><p>ZACKS CONSENSUS ESTIMATES</p><p>Revenue Estimates (In millions of $) </p><p>Q1 Q2 Q3 Q4 Year (Nov) (Feb) (May) (Aug) (Aug) </p><p>2012 18,157 A 18,651 A 17,752 A 17,073 A 71,633 A 2013 17,316 A 18,647 A 18,313 A 17,941 A 72,217 A 2014 18,329 A 19,605 A 19,210 E 18,787 E 75,895 E 2015 19,107 E 20,310 E 80,526 E </p><p>Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) </p><p>Q1 Q2 Q3 Q4 Year (Nov) (Feb) (May) (Aug) (Aug) </p><p>2012</p><p>$0.63 A $0.78 A $0.62 A $0.48 A $2.53 A 2013</p><p>$0.58 A $0.96 A $0.85 A $0.73 A $3.12 A 2014</p><p>$0.72 A $0.91 A $0.94 E $0.88 E $3.45 E 2015</p><p>$0.85 E $1.04 E $3.90 E Note: Quarterly figures may not add up to the annual figure due to rounding off Projected EPS Growth - Next 5 Years % 12 </p><p>April 25, 2014 </p></li><li><p> Equity Research WAG | Page 2</p><p>OVERVIEW </p><p>Headquartered in Deerfield, Ill., Walgreen Co. (WAG), popularly known as Walgreens, is the largest national retail pharmacy chain in terms of revenue and profitability. As of Nov 30, 2013, Walgreens operated 8,681 locations in all 50 states, the District of Columbia, Puerto Rico and Guam and the U.S. Virgin Islands, including 8,200 drugstores (142 more compared with the year-ago period). The company also operates infusion and respiratory service facilities, worksite health and wellness centers, specialty pharmacies and mail service facilities. Its Take Care Health Systems subsidiary manages more than 750 in-store convenient care clinics and worksite health and wellness centers. </p><p>The drugstores, apart from selling prescription drugs, also sell over-the-counter (OTC) medications, general merchandise, cosmetics, toiletries, household items and food and beverages. Due to carefully selected locations, the stores offer easy accessibility with many of them remaining open for 24 hours. The company ensures robust traffic in the stores by offering a broad selection of consumable merchandise backed by strong advertising programs. </p><p>In Aug 2012, Walgreens entered into a strategic partnership with a global international pharmacy-led health and beauty group Alliance Boots GmbH, in which it acquired a 45% stake for $6.7 billion. The company also has the option to obtain 100% ownership over the next three years for an approximate value of $9.5 billion in cash and stock. </p><p>Generic: The Current Scenario </p><p>The ongoing introduction of prescription drugs in the generic market is changing the mode of patient care which affects the business of drug retailers like Walgreens. The generic wave hampered Walgreens top-line in the past quarters. However, gross margin improved on account of higher generic prescription drug sales. While the introduction of generics has notably dragged sales over the last few quarters, the company expects the gross margin expansion to continue in the near term. Management asserted that the generic wave should significantly increase Walgreens gross profit per script compared to the gross margin which it earns on brands. </p><p>REASONS TO BUY </p><p>Prescription Drug Purchasing Front-Runner: Walgreens in its most recent effort to boost its market presence, decided to focus on its supply chain performance. With this aim, on Mar 18, 2013, the company along with Alliance Boots GmbH and AmerisourceBergen Corporation had announced various agreements and arrangements. It inked a 10-year pharmaceutical distribution agreement with AmerisourceBergen, effective Sep 1, 2013, to improve its global pharmaceutical supply chain for branded as well as generic drugs. AmerisourceBergen has replaced Walgreens former pharmaceutical distributor Cardinal Health as Walgreens contract with the latter had expired in Aug 2013. Earlier, AmerisourceBergen used to supply specialty drugs to Walgreens. The company s three-pronged deal with AmerisourceBergen underlines a strategic collaboration, equity alignment and distribution agreement. Apart from that, Walgreens entered into an agreement which provides AmerisourceBergen the ability to access generics and related pharmaceutical products through Walgreens Boots Alliance Development GmbH, a global sourcing joint venture between Walgreens and Alliance Boots. While Walgreens is riding the generic wave, the deal augments its buying capacity by a massive $3.5 billion. In calendar year 2014, AmerisourceBergen is expected to distribute substantial levels of generic pharmaceutical products that are currently distributed by Walgreens. At present, Walgreens is a step closer to exercising its right to purchase a minority stake in AmerisourceBergen following the regulatory clearance. As of Feb 25, the company purchased 10.5 million shares of AmerisourceBergen s stock and owned 4.5% of the company. Although the equity alignment is exercisable up to 23%, Walgreens can obtain a maximum of 30% stake (maximum limit per agreement) in AmerisourceBergen if the latter continues its share buyback activity. According to the company, the levels of generic pharmaceuticals distributed by AmerisourceBergen will increase throughout 2014. We believe, the contract between these three behemoths in their respective industries will build an incomparable global </p></li><li><p> Equity Research WAG | Page 3</p><p>platform in the retail or wholesale pharmacy industry. This will create a kingpin in the prescription drug purchasing space helping Walgreens to better serve the U.S. and European healthcare systems along with other growing markets globally. Walgreens is optimistic about the financial and operational benefits from the AmerisourceBergen deal for fiscal 2014 with margin expansion and bottom-line accretion. </p><p>New Alignments to Boost Growth:</p><p>In Mar 2014, Walgreens formed collaboration with Lebhar-Friedman Publishing to launch Discover Beauty Within, the first exclusive, beauty publication for mass retailer. The publication is focused on providing Walgreens and Duane Reade store customers with timely editorial content and valuable coupons on behalf of the retailers merchandising partners. In Jan 2014, Walgreens entered into a clinical collaboration agreement with Centura Health, a leading health care network in the U.S. to provide greater access to healthcare services. With the Affordable Care Act bringing millions of newly insured patients into the health care system, the relationship aims to help address some of the needs and challenges faced by both patients and caregivers. In September, Walgreens entered into a long-term partnership with Theranos, Inc., under which the new lab testing service of the latter will be available throughout the wide network of Walgreens pharmacies. As the largest retail pharmacy chain in the U.S. with more than 8,100 neighborhood pharmacies, Walgreens is expected to bring Theranos service to consumers nationwide. This service is currently available at Walgreens Palo Alto, California store. However, the company has plans to expand later this year. In Oct 2013, Walgreens also entered into a clinical collaboration with WellStar s Health System. As per the deal, the two companies will jointly provide coordinated and expanded health care services, while improving access to enhanced, inexpensive care for patients in the northwest Atlanta market. With the Affordable Care Act facilitating the entry of millions of new patients into the healthcare system, the merger is expected to be beneficial for Walgreens going ahead. It addresses the needs and challenges facing both patients and healthcare providers. These recent endeavors are expected to create a competitive edge for the company in the fast-growing pharmacy retailing market. </p><p>Strong Focus on Immunization Market:</p><p>Walgreens continues to strive to expand in the high-growth immunization market. It is currently the largest retail provider of flu immunizations in the U.S. In the last fiscal, the company provided more than 8.5 million immunizations, significantly up from 6.7 million the prior year. In the last reported quarter, the company witnessed a weak flu season compared to last year which resulted in fewer cough, cold and flu related prescriptions, and lower sales of over-the-counter products compared to the same period last year. However, it maintained meaningful promotional investments in daily living business in the quarter. In addition, through the first half of the fiscal 2014, Walgreens had a strong season for immunizations with a total of 8.6 million vaccines administered implying an increase of 11% year over year. Besides, the company also continued to build non-flu immunization business. Currently, Walgreens is the top retail provider of Zostavax, a vaccine for herpes zoster (shingles). This convinces us about the strength of Walgreens and its tremendous potential to grow its share in the $7.4 billion market. </p><p>In this regard, in Feb 2014, Walgreens formed an alliance with the National Minority AIDS Council (NMAC) to improve HIV treatment outcomes for African Americans living with HIV. This partnership will work to give improved pharmacists training and expand access to the pneumococcal vaccination specifically indicated for persons living with HIV as incidents of flu and pneumonia rise. Earlier in Jan 2014, reached its target to donate the value of three million life-saving vaccines for children in developing countries, upon successful completion of its immunizations campaign developed in partnership with the UN Foundation s Shot@Life campaign. </p><p>Moreover, to cover a huge 1.1 million HIV market in the U.S., in December Walgreens formed an alliance with the Centers for Disease Control and Prevention (CDC). Per the agreement, the company will develop a HIV patient-centered care model. According to Walgreens, this will be done through a national project to advance clinical integration and medication therapy management and will be helpful in improving HIV prevention and treatment outcomes. According to the agreement, 700 HIV-specialized pharmacies and specially trained Walgreens pharmacists with their lead medication care plans will provide data evaluation and outcomes reporting to thousands of HIV positive project participants. Walgreens pharmacists will meet </p></li><li><p> Equity Research WAG | Page 4</p><p>these project participants directly and create care plans that focus on medication adherence and also address other needs that include health education for added chronic conditions. </p><p>Strategic Steps to Drive Growth:</p><p>In order to stimulate customer demand amidst a challenging macroeconomic scenario, Walgreens has been taking a number of strategic steps. This includes the launch of customer loyalty program Balance Rewards in Sep 2012, which has recorded more than 100 million registrations to date. With almost 80 million active members Walgreens claims this to be the largest retail loyalty program in the industry. As per management, the Balance Rewards program has been generating majority of the sales. Besides, in Oct 2013, the company launched its new Balance Financial Prepaid MasterCard in Detroit, Milwaukee and Nashville. A nationwide card rollout is expected before year end and additional financial services in 2014. </p><p>In the quarter, the company also progressed with its other strategic growth driver which is, creating a Well Experience store. Notably, in 2011, Walgreens first introduced its Well Experience store format, which offers a new, enhanced layout, a completely revamped pharmacy and health care experience and a number of new product selections. Currently, Walgreens is successfully rolling out its Well Experience stores reaching a total of 628 across the country. </p><p>The company is also on an acquisition spree. Subsequent to acquiring a 45% stake in Alliance Boots GmbH for $6.7 billion, this leading retail pharmacy chain acquired a mid-South US-based regional drugstore chain for $438 million. Further, in Sep 2013, Walgreen inked a definitive agreement to acquire certain assets of privately owned regional pharmacy chain Kerr Drug, including 76 retail drugstores and specialty pharmacy business. The company believes that the wholesale business of Alliance Boots should improve its supply-chain performance. We believe that these steps will help expand its business in several key regions of the nation. As per management, Walgreens partnership with Alliance Boots is yielding positive results, with combined first half of fiscal 2014 synergies of $236 million. Moreover, the company expects second-year combined synergy program in the range of $375-$425 million, an increase from the previous second-year estimate of $350-$400 million. Moreover, the Alliance Boots deal was accretive by $0.08 to the EPS in the last reported quarter, in line with its expectation. The deal is expected to contribute $0.13 to $0.14 per share to adjusted earnings in the second quarter of fiscal 2014. As Walgreens strides on the synergy track, the company expects to attain synergies of $350 $400 million across joint operations in fiscal 2014 and $1 billion by the end of 2016. This alliance is expected to form the world s first pharmacy-driven health and wellbeing retail with...</p></li></ul>


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