Walgreens Boots To Gain From Altered Rite Aid Deal, Alliance

On Aug 18, we issued an updated research report on Walgreens Boots Alliance, Inc. (NASDAQ:WBA) , the Illinois-based leading pharmacy-led, health and wellbeing enterprise. The stock currently carries a Zacks Rank #3 (Hold).

Walgreens has outperformed its industry with respect to share price movement in the last month. The stock has gained 1.7%, ahead of the industry’s 1% rise during the period.

Walgreens’ shelving of the $17 billion Rite Aid (NYSE:RAD) acquisition deal came as a huge setback to the company’s investors. The buyout deal had once promised a strong platform for developing the company’s brand presence as well as its overall future business growth. However, delving into the deal’s latest details, we believe there is still much to hope for.

The new agreement would enable Walgreens to purchase nearly half of the Rite Aid business at a deal value, almost one-third of the original price. More specifically, the acquirer will take over nearly 2,186 stores, three distribution centers and a related inventory from Rite Aid for $5.175 billion in cash. Notably, the latter ran about 4,523 stores across 31 states and the District of Columbia as of Jun 3, 2017.

This apart, the contract’s financial outcome is pretty attractive. Post the new transaction’s initial closing, Walgreens expects it to be modestly accretive to its adjusted diluted net earnings per share in the first full year. Synergies from this new takeover are expected in excess of $400 million, to be entirely realized within three to four years of its initial closing.

Per Walgreens, this modified merger contract will also extend its growth strategy and offer additional operational plus financial benefits. It will help the company expand and optimize its retail pharmacy network in the key U.S. markets, including the Northeast. This partial consolidation with Rite Aid will help Walgreens gain a competitive edge.

Besides, the company’s new strategic pharmacy tie-ups and several recent programs including skin product launch and vaccination are encouraging. Earlier this year, the company partnered with communication service provider WPP (LON:WPP) to operate and develop multiple marketing and communications channels for its retail and wholesale businesses as well as its health and beauty product brands.

Walgreens Boots also inked a multi-year partnership agreement with global express delivery service provider FedEx Corporation (NYSE:FDX). The alliance is aimed at offering convenient access to FedEx drop-off and pickup services at several Walgreens Boots locations across the United States.

In the last few years, a slowdown in generic introduction, increased reimbursement pressure and generic drug cost inflation have been hampering the company’s margin significantly. Also, Walgreens Boots faces obstacles like increased competition and tough industry conditions. Even though the company continues to gain a decent market share from other traditional drug store retailers, major mass merchants namely Target and Wal-Mart (NYSE:WMT) are on track to expand their pharmacy businesses.

Risks from other channels such as supermarkets and mail order operations also pose a threat. In addition, industry conditions remain challenging as insurers slash reimbursement rates and raise prescription co-payments. Plus, currency fluctuations, weak macroeconomic environment and delay of Walgreens Boots’ long impending buyout of Rite Aid emerge as other headwinds.

Key Picks

Some of the better-ranked medical stocks are Align Technology, Inc. (NASDAQ:ALGN) and IDEXX Laboratories, Inc. (NASDAQ:IDXX) . While Align Technology sports a Zacks Rank #1 (Strong Buy), IDEXX Laboratories carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

IDEXX Laboratories has a long-term expected earnings growth rate of 19.8%. The stock has gained around 6.8% over the last six months.

Lantheus Holdings has a long-term expected earnings growth rate of 12.5%. The stock has surged 70.4% over the last six months.

Align Technology has a long-term expected earnings growth rate of 26.6%. The stock has rallied roughly 22.3% over the last three months.

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