Revisiting The Future Of Walgreens

| About: Walgreens Boots (WBA)


The Rite-Aid acquisition will close this fall.

Q3 earnings are out and I discuss the results.

Look to the guidance.

When I initiated coverage on Walgreens Boots Alliance (NASDAQ:WBA), I told you that this was the one big pharmacy play I had yet to cover. Of course, I routinely cover competitors Rite-Aid (NYSE:RAD) and CVS Health (NYSE:CVS) in great detail. But the thing about Walgreens Boots Alliance, which is in the process of buying Rite-Aid of course, is that this company is the first global pharmacy-led, health and wellbeing enterprise in the world. What I find incredible is all of the areas this company is involved in. As many of you know, Walgreens has been around for a long time. But this new company, WBA, was created through the combination of Walgreens and Alliance Boots in December 2014. It is now an extremely well diversified machine. But the stock has been kind of in neutral for a bit. That said, I think since it has been over three months since I have checked in with the name and it just released its Q3 earnings, I should revisit the name.

Of course, in its most recent quarter, the company continued its dominance. However, on a GAAP basis, Net earnings for the fiscal 2016 third quarter dropped 15.3% to $1.1 billion compared with the same quarter a year ago, while GAAP net earnings per diluted share dropped 14.4% to $1.01 compared with the same quarter a year ago. Of course, the GAAP earnings do not factor in necessary adjustments.

Factoring in some necessary items, adjusted fiscal 2016 third quarter net earnings jumped 14.7% to $1.3 billion. Adjusted fiscal earnings also spiked 15.7% on a per share basis to $1.18. Net sales in the third quarter increased 2.5% to $29.5 billion compared with the same quarter a year ago, largely due to the complete inclusion of Alliance Boots for the present quarter. The point here continues to be that the synergistic sales are expected to continue to grow for the company in 2016 and beyond. Synergies were $330 million in the quarter. But what continues to really excite me about the company is that it is making serious strides to save money and return cash to shareholders.

You should be aware the company has initiated a $1.5 billion cost savings program through the end of fiscal 2017. How? Well it has reorganized its retail field operations and is continuing to optimize its corporate office. The company has sliced corporate jobs and has also closed hundreds of underperforming stores. It is also working on a reduction of approximately 700 non-store based international retail roles. The company is also revamping its IT structure as well. While the company is seeking to save cash, it also is giving money back to shareholders. The company announced back in Q4 a 6.7% bump to its quarterly dividend to $0.36 per share. This marks the 40th consecutive year Walgreens has raised the dividend.

Looking ahead, the company expects the Rite-Aid acquisition will be completed this fall. The company a month ago completed a public offering of $6 billion in notes to fund the Rite-Aid acquisition and retire some of Rite-Aids' debt. The company increased its guidance for full-year fiscal 2016 low end of the adjusted net earnings by 10 cents to $4.45 to $4.55 per share on a diluted basis. Considering some analysts have price targets over $100, the direction of the company, the decent yield and the raised guidance, I think you can consider WBA as both a retail and healthcare play for your portfolio at present levels.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles, which are time sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.