Walgreens: Temporary Headwinds?

05/06/2016 7:00 am EST

Focus: STOCKS

Charles Carlson

Editor, DRIP Investor

Our latest featured recommendation has been stuck in the mud; shares of this drugstore retailer are down 17% from their 52-week high and have significantly underperformed the broad market over the last six months, notes Chuck Carlson, editor of DRIP Investor.

For long-time holders of Walgreens Boots Alliance (WBA), periods of sluggish performance are nothing new. The good news is that they are often followed by big bursts to the upside. The stock’s current ailments stem from a number of factors:

The company’s pending acquisition of Rite Aid (RAD) seems to be worrying investors. I am of the opinion that the outcome of the deal is a win-win for the company.

Should regulators approve the deal, I see Walgreens being able to do a lot with Rite Aid in terms of improving its operations and profit margins.

And if the deal falls through, there will be certain investors who will be relieved and likely bid up Walgreens stock. Thus, the big hindrance here is uncertainty, and that will eventually dissipate.

While per-share profits beat the consensus estimate in the latest quarter, revenues were slightly below expectations. The revenue miss took some steam out of the stock.

To be sure, revenues were adversely affected by the strong dollar, which trimmed revenue numbers by $750 million (the company’s miss was around $500 million).

Given Walgreens now large overseas presence, currency issues will weigh more heavily on revenue numbers going forward. 

The firm’s relationship with Theranos is not helping matters. Walgreens had a venture with Theranos, a startup lab-testing company, to offer testing services via some of its Walgreens locations.

Theranos is now under intense scrutiny from regulators over the accuracy of its testing equipment. While Walgreens has pulled back from the relationship, the attention Theranos is attracting is not helping Walgreens.

The good news is that none of these headwinds represents a fundamental or lasting problem with the company’s operations, which means long-term investors have an opportunity to buy a quality company at an attractive price.

The issue yields 1.8%, and dividend growth should be ample. Walgreens has lifted the dividend 40 consecutive years and should boost the payout at least 6% in the fiscal third quarter.

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By Chuck Carlson, Editor of DRIP Investor

 

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