On Friday, Barclays made a significant adjustment to Walgreens Boots Alliance's (NASDAQ:WBA) financial outlook, reducing the stock's price target from $15.00 to $11.00. The firm maintained its Underweight rating on the company's shares.
This decision followed Walgreens' third fiscal quarter earnings call, which highlighted ongoing profitability challenges, consumer spending pressures, and a strategic update that includes substantial store closures and the divestiture of a majority stake in VillageMD.
The report from Barclays pointed out that Walgreens' shares experienced a notable decline post-earnings announcement. The strategic review update, particularly the planned store closures, has raised concerns about the potential impact on Cardinal Health (NYSE:NYSE:CAH), given the companies' business relationship.
Still, Barclays believes the market may be overestimating the negative effects on Cardinal Health. An analysis suggested that the impact on Cardinal Health's EBIT might be less than 0.50% annually, translating to approximately a 1.30% impact over three years, or around 0.40% per year.
Barclays' analyst highlighted that despite the strategic steps Walgreens management is taking within the U.S. Healthcare sector, the broader challenging economic environment and persistent profitability issues in the U.S. Retail Pharmacy segment are likely to continue.
These factors support the firm's Underweight rating. Moreover, the analyst has revised down the profitability forecasts for Walgreens for fiscal years 2024 and 2025, reflecting these ongoing headwinds.
Walgreens' strategic review has included evaluating the potential closure of 25% of its stores. The analyst's assessment takes into account a 50% net loss of prescriptions from the stores slated for closure and a 50 basis point margin for the Cardinal Health/Walgreens contract, considering scale discounts. Despite the anticipated challenges, Barclays views the current pullback in Cardinal Health's stock as an opportunity for investors.
The revised price target and maintained Underweight rating on Walgreens Boots Alliance by Barclays reflect a cautious outlook for the company amid its strategic realignment and the broader market conditions. The firm's analysis suggests that while Walgreens is making necessary changes, the path ahead may still be fraught with economic and operational challenges.
In other recent news, Walgreens Boots Alliance reported third-quarter earnings for fiscal year 2024, revealing an adjusted earnings per share (EPS) of $0.63, which fell short of market expectations due to challenges in the U.S. retail pharmacy sector.
Consequently, Walgreens has revised its full-year outlook, now anticipating an adjusted EPS of $2.80 to $2.95 for fiscal year 2024. In response to these developments, both Truist Securities and Mizuho Securities have adjusted their price targets for Walgreens, reducing them to $13.00 and $15.00 respectively, while maintaining a hold and neutral rating on the stock.
As part of recent developments, Walgreens announced a strategic review update, including a footprint optimization program that could affect approximately 25% of the company's store network. The company is also refining its business model and planning investments in sectors like Boots UK and VillageMD. These changes reflect Walgreens' proactive approach to industry challenges and its commitment to future success.
Analysts from both Truist and Mizuho observed some positive signs from Walgreens' International and U.S. Healthcare segments, which could help mitigate some of the pressures faced by the pharmacy business. Despite the challenges, Walgreens is actively adjusting its pricing strategy and enhancing its omnichannel experience, reflecting its commitment to navigate through the tough retail conditions.
InvestingPro Insights
In light of Barclays' recent revision of Walgreens Boots Alliance's (NASDAQ:WBA) financial outlook, a glance at the latest InvestingPro data reveals a mixed picture for the company. Walgreens has a current market capitalization of 10.45 billion USD, indicating a sizeable presence in the retail pharmacy sector.
Notably, the company's adjusted price-to-earnings (P/E) ratio for the last twelve months as of Q3 2024 stands at 9.45, which could suggest a potentially undervalued stock if the company's turnaround strategies begin to bear fruit.
InvestingPro Tips indicate that Walgreens' dividend yield as of mid-2024 is remarkably high at 8.2%, which may appeal to income-focused investors, although the -47.92% dividend growth rate during the same period raises questions about the sustainability of future payouts. Moreover, with a Price to Book ratio of 0.68, the company's stock appears to be trading below its book value, which could attract value investors seeking assets at a discount.
The InvestingPro platform offers 15 additional tips for those looking to delve deeper into Walgreens' financial health and prospects. Interested readers can access these insights and more with a special offer: use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
The data also shows a significant 6.92% revenue growth for Walgreens over the last twelve months as of Q3 2024, which may indicate underlying business resilience despite the challenges noted. Still, investors should be mindful of the recent price total returns, with a one-year return at -55.21%, underscoring the volatility and market pressures the company faces.
As Walgreens continues to navigate its strategic realignment, these metrics can provide a more nuanced understanding of the company's current market position and future potential.
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