Walgreens Boots Alliance doesn't make the list of the best stocks to invest in in 2021.
This is why.
22:02 18 May 2021
Walgreens Boots Alliance isn't among the best stocks to invest right now according to analysts. That is mostly because social distancing and increased hand washing have reduced the spread of the common cold and flu and hurt sales of over-the-counter medicines.
Analysts like the company's emphasis on healthcare with the ramp-up of VillageMD primary care clinics and the sale of most of the Wholesale division. We also think that Rosalind Brewer is a perfect pick as the company's new CEO. Ms. Brewer has deep experience as chief operating officer at Starbucks and as former president of Walmart's Sam's Club. In our previous note, we said that the new CEO should have deep experience in healthcare, exposure to the complexities of e-commerce, and a proven record of selecting projects that boost return on capital. Ms. Brewer's experience with Starbucks advanced digital capabilities and with Amazon, where she previously served as a board member, far exceed our expectations. Her leadership at Sam's Club gives her experience running a huge retailer and an advanced supply chain. She also has experience with pharmacy operations; Walmart, which includes Sam's Club, is the number-three pharmacy chain in the U.S. behind Walgreens and CVS.
On March 31, WBA reported a 10.1% decrease in fiscal 2Q adjusted earnings from continuing operations to $1.26 per share. In 2Q, the company reclassified Alliance Health as a discontinued operation. The previously discussed divestiture is scheduled to be completed by the end of FY21. Our estimate including Alliance Health was $1.20.
WBA raised its FY21 earnings guidance to mid- to high single-digit growth from low single-digit growth. WBA said that the increase reflected the company's strong first-half results and expectations for significant second-half growth as COVID-19 vaccinations accelerate. The expected increase applies to adjusted EPS from both total and continuing operations. Going forward, our estimates will be on an adjusted basis from continuing operations. On this basis, WBA earned $4.28 per share last year. Growth of 4%-9% would put adjusted EPS from continuing operations at $4.45-$4.67. WBA earned $2.36 per share, on this basis, in 1H21. That puts the implied 2H guidance at $2.09-$2.31. WBA earned an adjusted $1.62.
Adjusted operating income from continuing operations fell 22.5% to $1.2 billion in 2Q. The decrease reflects pressure from COVID, offset by cost-savings initiatives. Sales of $32.8 billion rose 4.6%, for the quarter ended on February 28. If we include sales from discontinued operations. The consensus was also about $36.5 billion. Sales in the biggest segment - now called United States - were up 0.4% in 2Q to $27.3 billion. Comp sales were up 2%, with pharmacy sales up 4.5% and retail comps down 3.5%. Sales have been hurt by an exceptionally weak cold and flu season, reflecting social distancing precautions and fewer visits to doctors (who often send patients away with a prescription.) Sales of discretionary items, including beauty products, continued to decline. Excluding seasonal flu remedies, there were some positive signs in the health and wellness category. Operating income saw ongoing reimbursement pressure.
Sales of $5.4 billion in the International business have a lot of moving parts. There are a few important takeaways. First, sales rose 32.6%, with an 8.7-percentage-point contribution from favorable exchange rates. The remaining increase of 23.9% on a constant-currency basis reflected the consolidation of the company's new joint venture in Germany. Sales in the important Boots UK business were down 17.8%.
EARNINGS & GROWTH ANALYSIS
Our new FY21 estimate excludes earnings from the businesses that the company is divesting and will coincide with what the company is calling 'adjusted EPS from continuing operations.' Our estimate is on a reported rather than a constant-currency basis. Our estimate is $4.60. This represents a 7.5% increase from the $4.28 that the company earned on a comparable business last year. The company filed an 8-K with reclassifications. We fully expect to make adjustments as we get a better understanding of the margin structure of the new segments and the seasonality of profits. At this point, we don't know what basis will be reflected in the consensus numbers published by different organizations.
This represents about a 12% increase from our FY21 estimate. Earnings should benefit as store traffic rebounds from COVID amid what we expect will be a more normal cold season next winter. As a reminder, we previously reduced our sales estimate based on the divestiture of most of Alliance Healthcare. We also raised our operating margin estimate because the company is selling lower-margin businesses. Our operating profit forecast is $5.8 billion.
FINANCIAL STRENGTH & DIVIDEND
Our FY21 estimate was below 20% before we adjusted our model to reflect the divestiture of Alliance Healthcare. We expect continued reimbursement pressure in the remaining U.S. and UK pharmacy businesses; however, it may take a few quarters to get a good feel for the overall gross margin given the new mix of businesses.
The $6.5 billion sale of Alliance Healthcare gives the company the opportunity to reduce debt. Walgreens ended 2Q21 with $1.0 billion.
MANAGEMENT & RISKS
Ms. Brewer has an impressive resume, most recently as COO at Starbucks. Prior to that, she served as president of Walmart's Sam's Club division. She was also a board member at Amazon before stepping down to take her new job at WBA.
WBA owns 56.8 million shares of AmerisourceBergen, 28% of the company. Ownership will go to 29% when WBA closes the sale of the majority of Alliance Healthcare to Amerisource. The company has reclassified its operations with the divestiture of the wholesale businesses and the pharmacy businesses in Norway, Lithuania, and the Netherlands. The new organization has a United States unit, an International unit, and a Corporate & Other segmeincluding corporate costs and company investments.