Cowen Upgrades Walgreens: Here's Why

Shares of Walgreens Boots Alliance Inc (NASDAQ: WBA) traded higher after Wednesday's market open, but gave up its gains despite an upgrade by analysts at Cowen.

In a report published Wednesday, Cowen and Company analyst Charles Rhyee upgraded Walgreens to Outperform from Market Perform with a price target boosted to $104 from a previous $90.

The Upgrade

According to Rhyee, Walgreens' recent financial performance and commentary during its third-quarter conference call may suggest that its synergy and cost-cutting guidance are likely to end up being "conservative."

"On Walgreens' F3Q15 earnings call, management noted it reaped certain benefits of its cost reduction program earlier than expected," Rhyee wrote. "We think realizing benefits sooner than expected should magnify the impact of the cost reduction program given its compounding nature."

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Rhyee continued that management's initiatives to drive its front-end retail operations in the United States should make it "increasingly easier" to offset the continued reimbursement pressure that is weighing on the overall gross margins. The company is now in a better position to focus toward health and beautify categories and can take cues from its operations overseas.

Brands such as Liz Earle are seeing success in Europe and Boots generates more gross profit dollars from front-end sales than it does from pharmacy sales. The analyst added that over the medium term, proprietary health and beauty brands can achieve a penetration rate of roughly 5 percent.

Acquisitions On The Horizon?

Rhyee also pointed out that Walgreens' management team remains committed to participate in the "wave of consolidation" and that another acquisition is "likely." The analyst named Rite Aid Corporation (NYSE: RAD), Express Scripts Holding Company (NASDAQ: ESRX) and AmerisourceBergen Corp. (NYSE: ABC) as "the most likely targets," with one of these names likely being acquired in the medium term.

Looking Forward

Finally, Rhyee suggested that management will likely exceed its fiscal 2015 earnings per share guidance of $3.70 to $3.80 in adjusted earnings per share while also increasing its fiscal 2016 earnings per share guidance of $4.25 to $4.60.