Will Walgreen Kick Its Smoking Habit On Tuesday?

| About: Walgreens Boots (WBA)

Walgreen Corp. (WAG) is set to report FQ2 2014 earnings before the market opens on Tuesday, March 25th. Walgreen is the largest pharmacy chain in the United States. This quarter, Wall Street projects WAG’s earnings per share to drop by 3% compared to FQ2 last year. Despite reduced profit, bolstered in-store services, such as screenings and vaccinations are expected to grow revenue by 5% on a year-over-year basis. In February, rival CVS Caremark (NYSE:CVS) announced it will stop selling cigarettes and tobacco products by October 1st. Larry J. Merlo, president and CEO of CVS announced, “Ending the sale of cigarettes and tobacco products at CVS/pharmacy is the right thing for us to do for our customers and our company to help people on their path to better health.” CVS expects to lose over $2 billion in annual sales by kicking the habit. Going into Tuesday's earnings report, there is mounting pressure on Walgreen to follow CVS and end its tobacco sales. Here is what investors are expecting from Walgreen.

The information below is derived from data submitted to the Estimize.com platform by a set of Buy-Side and Independent analyst contributors.image

(Click Here to see Estimates and Interactive Features for Walgreen)

The current Wall Street consensus expectation is for Walgreen to report 93c EPS and $19.557B revenue, while the current Estimize.com consensus from 16 Buy-Side and Independent contributing analysts is 92c EPS and $19.587B in revenue. This quarter, the buy-side, as represented by the Estimize.com community, is expecting Walgreen to miss the Wall Street consensus by 1c EPS and beat the Street’s forecast on revenue by $30 million.

By tapping into a wider range of contributors, including hedge-fund analysts, asset managers, independent research shops, students, and non-professional investors, Estimize has created a data set that is more accurate than Wall Street up to 69.5% of the time; but more importantly, it does a better job of representing the market’s actual expectations. It has been confirmed by an independent academic study from Rice University that stock prices tend to react with a more strongly associated degree to the expectation benchmark from Estimize than from the Wall Street consensus.

The magnitude of the difference between the Wall Street and Estimize consensus numbers often identifies opportunities to take advantage of expectations that may not have been priced into the market. In this case, we are only seeing a small difference between the 2 groups' expectations.image

The distribution of estimates published by analysts on the Estimize.com platform range from 85c to 98c EPS and from $19.400B to $20.112B in revenues. This quarter, we're seeing a wide distribution of estimates on Walgreen.

The size of the distribution of estimates relative to previous quarters often signals whether or not the market is confident that it has priced in the expected earnings already. A wider distribution of estimates signals less agreement in the market, which could mean greater volatility post-earnings. image

Over the past 4 months, the Wall Street EPS consensus fell from $1.01 to 93c, while the Estimize consensus also decreased from 99c to 92c. Meanwhile, the Wall Street revenue forecast remained relatively flat, slipping from $19.561B to $19.557B, while the Estimize forecast advanced steadily from $19.471B to $19.587B. Timeliness is correlated with accuracy, and upward analyst revisions towards the end of the quarter are often a bullish indicator.image

The analyst with the highest estimate confidence rating this quarter is TheEmulator23, who projects 94c EPS and $19.576B in revenue. In the Winter 2014 season, TheEmulator23 is rated as the 12th best analyst and is ranked 22nd overall among over 4,000 contributing analysts. This season, TheEmulator23 has been more accurate than Wall Street in forecasting EPS and revenue 60% and 54% of the time, respectively, throughout 149 estimates. Estimate confidence ratings are calculated through algorithms developed by deep quantitative research, which looks at correlations between analyst track records and tendencies as they relate to future accuracy. In this case, TheEmulator23 is expecting Walgreen to beat the Estimize community’s forecast on EPS, but come up short on revenue.

This quarter, the Estimize community is expecting Walgreen to come up short of Wall Street’s quarterly profit target. The harsh weather this winter has kept customers off the road and out of stores, leading retailers to offer aggressive sales to get shoppers into stores, which can have a cost on the bottom line. Although profit is expected to be lower, the community expects quarterly revenue to increase by $941 million compared to FQ2 last year. Investors will also be waiting to see if Tuesday’s earnings report brings any announcement about Walgreen's decision to keep after tobacco sales, or follow CVS and give them up completely.

Disclosure: None