When Walgreens Boots Alliance Inc (NASDAQ:WBA) reports its fiscal second-quarter earnings on Wednesday, investors won’t be focused on the numbers. Without much growth (projections show just 4% year-over-year earnings growth), roughly flat sales and little macro news to suggest a change in consumer spending, there’s no reason to see a major move in WBA stock after earnings.
That said, Walgreens earnings will be watched closely. Investors will be keenly focused on the status of the company’s long-awaited acquisition of Rite Aid Corporation (NYSE:RAD).
The merger between Walgreens and Rite Aid was originally announced in October 2015. Yet regulatory concerns have held up the deal, with Walgreens cutting its price for RAD stock to a range of $6.50 to $7 in January, from an original $9 at the time of the announcement.
All told, between the Rite Aid efforts and the launch of a new mail service pharmacy company, there will be plenty to talk about after Walgreens’ earnings report. At the moment, however, the actual earnings numbers hardly appear headline worthy.
The WBA/RAD Merger
Rite Aid shareholders are more focused on Walgreens’ earnings than those owning WBA stock. For Walgreens, acquiring Rite Aid would spur much-needed growth, but the bull case for WBA stock does not rest solely on this deal. Walgreens still pays a nearly 2% dividend — which has increased every year for 41 years. Its steady growth and stable revenue base makes it a core long-term holding. For Rite Aid, however, the merger looks more critical.
Rite Aid continues to struggle with an $8 billion-plus debt load and falling profits. Deutsche Bank said last week that it believed RAD stock would be worth just $2.25 if the Walgreens deal failed. And with RAD stock trading at $4.19, against an offer price of at least $6.50, investors appear to be pricing in a less-than-50% chance of the Walgreens takeover occurring.
Will Walgreens Earnings Shed Any Light On The Merger?
So investors will be listening intently for any commentary from Walgreens on the progress of the merger. A recent report suggests the company has set a deadline with the FTC on the approval of the acquisition. Should Walgreens confirm that decision, it would give some clarity to the situation – not just for WBA stock, but for Rite Aid and Fred’s, Inc. (NASDAQ:FRED), who is set to buy stores that will be divested as part of the WBA-RAD tie-up.
There should be some skepticism as to whether Walgreens actually will have much to say, however. Executives usually remain rather tight-lipped on pending deals, rather than risk the ire of regulators. Investors expecting a move in RAD or FRED, in particular, off the report seem likely to be disappointed. With sentiment toward the deal clearly negative (FRED stock has declined by about one-third since the original announcement that it would purchase stores), no news is likely to be bad news for Fred’s and Rite Aid stock.
Enter AllianceRx Walgreens Prime
The other point of discussion on the Walgreens earnings call likely will be the agreement signed with several Blue Cross and Blue Shield plans this week. AllianceRx Walgreens Prime will provide mail-order and specialty pharmacy services, in a bid to push back against increasing prices from major drugmakers like Pfizer Inc. (NYSE:PFE) and Merck & Co., Inc. (NYSE:MRK).
The joint venture also puts Walgreens in more direct competition with pharmacy benefit managers. Among them are Express Scripts Holding Company (NASDAQ:ESRX) and the Caremark unit of rival CVS Health Corp (NYSE:CVS). It’s an effort to protect margins — which have been pressured of late for WBA stock — and control more of the pharmaceutical distribution process.
Investors will be listening closely to hear Walgreens’ plans for that business — and if it can counteract some of the pricing pressure in the core pharmacy business.
Bottom Line on WBA Stock
And investors will be watching the numbers as well, even if the news seems likely to dominate the headlines coming out of Walgreens earnings. WBA stock traditionally has outperformed the market — but that’s changed over the past 18 months. Walgreens stock actually trades below levels seen after the Rite Aid deal was announced. (Of course, its decline pales in comparison to that of RAD.)
There’s room for a nice gain in WBA stock. Walgreens needs to show some optimism toward the Rite Aid closing and show stability in sales and earnings. Those are two big caveats, however, and even strong earnings may not help WBA stock. Walgreens earnings have topped consensus for four consecutive quarters, yet WBA stock hasn’t budged.
Rather, the focus for not only Walgreens stock, but RAD and FRED, will be on the merger. Investors who are looking for such news might wind up being disappointed — and they’re unlikely to react well if that’s the case.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
