Baird Updates Its View On Walgreen's With New Rite-Aid Assumptions

Ahead of Walgreens Boots Alliance Inc (NASDAQ: WBA)'s fiscal year second-quarter results, Baird updated its view on the company with its new Rite Aid Corporation (NYSE: RAD)'s assumptions.

Walgreens is scheduled to release its quarterly results before the markets open on April 5, 2017.

Walgreen's Confidence

Analyst Eric Coldwell highlighted the fact that Walgreens sounded confident on Tricare start, procurement synergies, front store mix/margin at its last update. This is despite a difficult environment, the analyst said. The analyst also recapped the company's fiscal first-quarter results, which he termed was largely in line with expectations.

Following an upward revision to the low end of the company's fiscal year 2017 adjusted earnings per share guidance to $4.90 following its first-quarter results, the analyst noted that the company lowered the guidance in late January to $4.90 to $5.08 from $4.90 to $5.20, removing Rite Aid accretion.

Below-Consensus On 2Q Revenues But Ups EPS Estimate

Baird said it is below the Street on second-quarter revenues, citing currency headwind and the prior year leap-day comparison. Specifically, the firm expects revenues of $29.7 billion, down an estimated 1.7 percent, compared to the consensus estimate of $30.3 billion.

However, the firm raised its earnings per share estimate to $1.36 from $1.30, attributing the upside to solid brand price increase activity in January, ABC upside in calendar year fourth quarter earnings per share and further reflection on Walgreen's comments from January regarding incremental procurement, synergies, front store mix/margin improvement and Tricare start.

Expects Strong Second Half

The firm expects Walgreens to have a stronger fiscal-year, second-half finish, as potential timing mismatch between rate resets and volume ramp drove some uncertainty in the fiscal-year second quarter.

"In addition to Tricare, OptumRx 90-day at retail and Prime preferred network agreements (Prime specialty pharmacy combination still to come) should layer into results," the firm said.

Updating Model On Changed Rite Aid Assumptions

Baird updated its Rite Aid model, assuming an Aug. 1 closure of the deal, 1,200 store divestitures, reduced purchase price and further reductions to core Rite Aid estimates, taking its 2018 EBITDA estimates down 10 percent below its model.

Accordingly, the firm lowered its earnings per share accretion estimate to 0 percent in 2017, down from $0.06 previously, $0.17 in 2018, down from the prior $0.33, and $0.55–$0.65 in the long term. The firm estimates long-term synergies of $1 billion.

U.K. Reimbursement Cuts To Hurt

Commenting on Walgreens' international retail pharmacy, Baird noted that additional U.K. reimbursement cuts began at the start of the fiscal year second quarter of 2017. "However, front-store sales growth improved in December and WBA is focused on offsetting cost actions," Baird said. Although the segment accounted for less than 15 percent of EBIT, the firm believes the magnitude of declines would materially impact consolidated results.

Baird maintains its Outperform rating on the shares of Walgreens, while it has a $96 price target for the shares.

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