2 Huge Thumbs-Up for Walgreens Boots Alliance, With Rite Aid Hanging in the Balance

It is not that often that one company gets two huge thumbs-up from analysts in the same week when there is not an earnings report. That is the case for Walgreens Boots Alliance Inc. (NASDAQ: WBA) during the week of September 2, 2016. Merrill Lynch reaffirmed its position in the firm’s Top 10 U.S. Ideas List for the third quarter, and Credit Suisse added it the firm’s prized U.S. Focus List. This also has key implications for Rite Aid Corp. (NYSE: RAD) due to the pending merger.

What matters here is how far Walgreens has come, and that it may perhaps avoid much of the post-Brexit woes compared to other companies that operate in the United States and in Britain. Another issue is that massive size with a market cap of $88 billion. If the analysts following Walgreens are correct, this could be among the next mega-cap stocks to reach a market value of $100 billion.

The more pertinent of the two key analyst calls came from Credit Suisse. After all, this was a new addition, and it sees more implied upside to the price target. Credit Suisse had an Outperform rating, and the firm’s Robert Willoughby has a $95 price target.

Credit Suisse sees Walgreens standing to benefit in the near term from continuing cost and working capital management opportunities. An imminent clarity on the Rite Aid deal and further expansion of its payor relationships are also seen as upside opportunities. Credit Suisse sees its potential risks coming from reimbursement challenges, weak front-end sales trends and a failure to successfully close the Rite Aid deal.

Walgreens is currently trading at just 8.7 times Credit Suisse’s 2017 EBITDA estimate. That is below the average multiple of 9.5 times for the pharmaceutical supply channel. Its $95 price target implies that shares can trade at 10.1 times EBITDA with an improved economic profit opportunity.

As far as the Rite Aid exposure, Credit Suisse’s report said:

The successful closing of the Rite Aid acquisition in the second half of 2016 brings meaningful revenue growth, cost cutting, and cash flow opportunities to drive Walgreens Boots’ shares materially higher. Downside from the deal not closing as expected is limited, in our view, given new and potentially more preferred pharmacy network agreements with the leading PBMs, contributions sooner than expected from the early AmerisourceBergen warrant exercise, and ongoing capital deployment.

Merrill Lynch’s Steven Valiquette has a Buy rating on Walgreens, with a $94 price objective. Valiquette sees Walgreens as an attractive vehicle for total return, noting the company’s history of annual dividend hikes. His report for the Top 10 Ideas list said:

The company is levered to the growing healthcare market in both the US and international markets. Walgreens Boots Alliance is also in the midst of change with the Alliance Boots management team reducing costs in the legacy Walgreens operations and placing greater focus on higher margin products. Walgreens Boots Alliance is also pursuing a deal with Rite Aid, which could see the company achieve significant synergies through cost cuts and efficiencies in procurement. In the short-term, we expect the company to also benefit from generic pricing erosion in the US marketplace. Walgreens Boots Alliajnce also just added another major PBM alliance with the announcement of a long-term strategic alliance with Prime Therapeutics, which is the 4th largest PBM in the US market.

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