Walgreens Boots (WBA) Q3 Earnings: Will The Stock Beat?

Walgreens Boots Alliance, Inc. (NASDAQ:WBA) is scheduled to report third-quarter fiscal 2016 earnings results before the opening bell on Jul 6.

Last quarter, the company delivered a positive earnings surprise of 3.15%. In fact, Walgreens Boots’ earnings have outpaced the Zacks Consensus Estimate in all of the past four quarters, with an average beat of 8.81%. Let’s see how things are shaping up prior to this announcement.

WALGREENS BAI Price, Consensus and EPS Surprise

WALGREENS BAI Price, Consensus and EPS Surprise | WALGREENS BAI Quote

Factors at Play

After the successful integration of Alliance Boots, Walgreens Boots is now eyeing U.S. retail pharmacy chain, Rite Aid. The company expects the Rite Aid deal to exceed the combined synergy goal of $1 billion by the end of fiscal 2016. It is also focusing on improving its core performance over the near term.

Meanwhile, the company continues to invest in key areas, including information technology, to develop its customer base – a policy adopted by management in the recent past. Per management, the strategy has already resulted in free cash flow of $2 billion in the second quarter of fiscal 2016, signifying a trend that is expected to continue in the third quarter and beyond.

Moreover, at the end of the fiscal second quarter, Walgreens Boots announced its partnership with OptumRx, under which it will offer 24/7 pharmacists services to OptumRx members. Per management, the deal will give Walgreens Boots the opportunity to continue boosting its existing operations in both retail and pharmacy. The deal is expected to enhance Walgreens Boots’ presence in the space.

On the flip side, the company continues to face challenges from other retail giants as well as pricing pressure due to relentless government initiatives to curb healthcare costs. Also, fewer generic drug introductions and the ongoing generic inflation have been hampering the company’s gross margin.

Walgreens Boots currently expects adjusted EPS in the $4.35–$4.55 range for fiscal 2016, narrower than its earlier guided range of $4.30–$4.55. The lowered projection primarily reflects the anticipated impact of suspending the share buyback program to fund the Rite Aid deal, negligible material accretion from this deal and the continuation of normal anti-dilutive buyback program relating to equity incentives. The revised outlook considers no major changes in currency exchange rates either.

The current Zacks Consensus Estimate for Walgreens Boots is $4.49 for 2016, well within management’s guidance range.

Earnings Whispers

Our proven model does not conclusively show that Walgreens Boots is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. However, that is not the case here, as you will see below.

Zacks ESP: Walgreens Boots has an Earnings ESP of 0.00%.That is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $1.14.

Zacks Rank: Walgreens Boots’ Zacks Rank #3 increases the predictive power of ESP. However, its 0.00% ESP makes surprise prediction difficult.

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies you may consider as our model shows that they have the right combination of elements to post an earnings beat in the upcoming quarter:

Bristol-Myers Squibb Company (NYSE:BMY) , with an Earnings ESP of +1.52% and a Zacks Rank #1.

Henry Schein, Inc. (NASDAQ:HSIC) , with an Earnings ESP of +0.62% and a Zacks Rank #2.

Laboratory Corp. of America Holdings (NYSE:LH) , with an Earnings ESP of +0.87% and a Zacks Rank #2.