Will Walgreens Boots Alliance Inc (NYSE:WBA) buy Rite Aid Corporation (NYSE:RAD) this summer or will the FTC block the deal? That question has been top of mind on Wall Street for quite some time. Investors have been closely watching every development in the two year saga and the “Will They/Wont They?” press is probably making your head spin.
Just this week, news that the deal will actually go through sent both stocks higher. However, not surprisingly, the news contradicts reports released just a few weeks earlier claiming that the deal was extremely unlikely.
The bottom line is that it will be impossible to tell whether the Walgreens-Rite Aid merger is going to go through until a final decision has been made. Until then, investors should look at the two companies based on the assumption that the merger isn’t happening, and from that vantage point, WBA stock looks like a pretty good buy.
What WBA Stock Owners Stand to Gain
WBA has fallen nearly 5% over the past month as investors worried about the details of the RAD deal and the consequences if it doesn’t happen. While it’s true that the merger would certainly be a good thing for both stocks, I think WBA is being unfairly punished.
Walgreens will be able to go on successfully without RAD under its belt, and if the deal is blocked by the FTC, some analysts expect to see WBA management up its share repurchases. That means that either way, shareholders will benefit. Not to mention that big market moving events like this one tend to end with a lift for the stocks involved as investors absorb the news, bad or good, and move on.
The turmoil surrounding the merger has kept WBA stock from making its way higher over the past year, so the pharmacy chain’s shares are undervalued compared to the rest of the sector. WBA stock has a price-to-earnings ratio of 19.86, below the S&P 500 average of 22.95. However, what’s most appealing is the fact that Walgreens is only trading at 15.60 times its forward earnings compared to the average forward P/E in the consumer staples space of 21.60. To top it off, WBA has considerably less debt than most of its pharmacy chain peers.
What About AMZN?
Another big weight around WBA stock’s neck has been Amazon.com, Inc.’s (NASDAQ:AMZN) potential entry into the sector. It’s no secret that I’m a huge AMZN fan, but I don’t think the e-commerce giant is going to put everyone in every sector out of business. Yes, I think companies like WBA need to up their game by improving their home delivery and online businesses, and yes, I think Amazon entering the industry makes for stiff competition, but I don’t think it will be a deal breaker for WBA.
Also, you’ve got to keep in mind that Amazon hasn’t made any major moves into the pharmacy sector and that a lot of the concern comes from hearsay surrounding AMZN’s purchase of Whole Foods Market, Inc. (NASDAQ:WFM), which, by the way, might face its own slew of antitrust issues. So, while AMZN certainly could become a threat in the far-off future, WBA investors are probably safe to put that problem on the back-burner for now.
Bottom Line on Wallgreens
With Walgreens earnings set to drop later in the week, investors would be wise to put the firm on their watchlist. WBA is expected to report an 0.8% rise in sales from the previous year, and investors will likely want to hear more about the potential RAD deal. It’s important to note that WBA has undershot expectations every quarter for the last six, so it might be worth holding out and buying WBA following its earnings release. However, any positive rhetoric about the RAD deal will send the stock markedly higher.
As of this writing, Laura Hoy was long AMZN and RAD.