Will Walgreen's Business Pick Up When CVS Drops Cigarette Sales?

| About: Walgreens Boots (WBA)

Summary

Walgreen Co. is set to report FQ3 2014 earnings before the market opens on Tuesday, June 24th.

Walgreen has refused to fold on tobacco and could stand to add billions in sales from cigarette shoppers after CVS Caremark stops selling tobacco products in October.

For now, Wall Street expects continued modest growth from Walgreen. This quarter, sales are expected to increase about 5% compared to the same quarter last year, while earnings increase by 9c per share.

Walgreen Co. (WAG) is set to report FQ3 2014 earnings before the market opens on Tuesday, June 24th. Walgreen is the largest pharmacy chain in the United States. In February, Walgreen’s biggest competitor, CVS Caremark (NYSE:CVS), announced that it will become the first major pharmacy chain in the US to voluntarily give up cigarette and tobacco sales. Despite mounting pressure from many state attorney generals, Walgreen has refused to fold on tobacco and could stand to add billions in sales from cigarette shoppers after CVS Caremark stops selling tobacco products in October. For now, Wall Street expects continued modest growth from Walgreen. This quarter, sales are expected to increase about 5% compared to the same quarter last year, while earnings increase by 9c per share. Here’s what investors are expecting from Walgreen on Tuesday.

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

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

The current Wall Street consensus expectation is for Walgreen to report 94c EPS and $19.341B revenue, while the current Estimize.com consensus from 15 Buy Side and Independent contributing analysts is 95c EPS and $19.275B in revenue. This quarter, the buy-side as represented by the Estimize.com community is expecting Walgreen to beat the Wall Street earnings consensus by 1c per share while coming up short on revenue.

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.

More importantly, it does a better job of representing the market’s actual expectations. It has been confirmed by Deutsche Bank Quant. Research and 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. Here we are seeing an average sized differential between the two groups’ expectations.

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The distribution of earnings estimates published by analysts on the Estimize.com platform ranges from 86c to 99c per share and from $19.100B to $19.476B in revenues. This quarter, we’re seeing a moderate range of estimates on Walgreen earnings.

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 wide range of earnings estimates signals less agreement in the market, which could mean greater volatility post earnings.

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Over the past 3 months, the Wall Street consensus bounced around, but both started and ended the period at 94c, while the Estimize consensus edged higher from 94c to 95c. Meanwhile, the Wall Street revenue forecast spiked from $19.194B to $19.341B, while the Estimize sales consensus shot up from $19.137B to $19.275B. Timeliness is correlated with accuracy, and upward analyst revisions going into an earnings are often a bullish indicator.

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The analyst with the highest estimate confidence rating this quarter is turbinecity, who projects 96c EPS and $19.217B in revenue. Turbinecity was our Winter 2014 season winner and is ranked 2nd overall among over 4,500 contributing analysts. This season, turbinecity has been more accurate than Wall Street in forecasting EPS and revenue 60% and 51% of the time, respectively, throughout a massive 1169 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, turbinecity is expecting Walgreen to report slightly higher earnings than the Wall Street consensus, but less revenue.

This quarter, the Estimize community is expecting Walgreen to edge past the Wall Street consensus by 1c per share while missing revenue estimates by $66 million. Walgreen may have a growth opportunity later this year if a significant portion of CVS shoppers switch over to Walgreen to satisfy their cigarette buying habits. For now, more modest gains are expected. Over the previous 4 quarters, Walgreen has increased revenue on a year over year basis between 3% and 6% each period, and contributing analysts on the Estimize.com platform are expecting another quarter of 5% sales growth on Tuesday.

Disclosure: None