Mizuho 'Struggles To Find Reasons' To Maintain Walgreen At Buy, Downgrades Shares To Neutral

Ann Hynes of Mizuho downgraded shares of Walgreen (NYSE: WAG) on Tuesday from Buy to Neutral with a price target lowered from $83 to $72, noting an unfavorable risk to reward profile over the next year.

Walgreen released an updated proxy on November 24 providing earnings per share and EBITDA estimates through fiscal 2018 following its acquisition of Alliance Boots. According to Hynes, the company's objectives “will be difficult to achieve” due to integration risk, increased international exposure and limited near-term potential for improvement in base operating trends.

Hynes also notes that there is “limited meaningful” upside to the company's earnings per share estimates through fiscal 2017 and that adjusted earnings per share estimates already assumes the deployment of the majority of free cash flow, so any upside needs to come from additional leverage.

Hynes explains that the combination of Alliance Boots and Walgreen should generate more than $4 billion in free cash flow annually and that the estimates assume much of that cash is deployed via share repurchases, limited debt repayment and dividends over the next three years. In addition, any M&A activity would likely come from Alliance Boots expanding its international footprint.