In May, Walgreens Boots Alliance Inc. (WBA)’s biggest competitor in the U.S., CVS Health Corp. (CVS), agreed to purchase nursing-home pharmacy Omnicare Inc. (OCR); a few weeks later, CVS signed a deal to acquire Target Corp. (TGT)’s pharmacies, expanding CVS Health’s retail presence in new markets, such as Seattle, Denver, Portland, Ore., and Salt Lake City by putting its brand, in retail locations across 47 states so WBA’s top rival in the U.S. has been getting bigger. This is why WBA’s next step is to acquire Rite Aid Corp. (RAD).
Walgreens already has a foothold in the drug-distribution business after it signed a 10-year agreement with AmerisourceBergen Corp. (ABC) in 2013, and it became the company’s third-largest shareholder, but this agreement doesn’t stop the management's search for new profitable partnerships, and the reported fiscal fourth-quarter earnings shows how Walgreens Boots Alliance managed cost savings from mergers and it has saved $799 million in fiscal 2015 after combining with Alliance Boots GmbH last year.
Why Walgreens wants to acquire RAD
Even so due to a $33.2 million loss on debt retirement related to the redemption of the company’s 8.00% senior secured notes, net income decreased by 83%, but the company reported an increase of 17.5% in revenue in the second quarter; also during the second quarter Rite Aid completed the acquisition of EnvisionRx and with it, during the quarter Rite Aid could work as a team to accelerate its transformation into a retail healthcare company. If Walgreens gets bigger in drug-benefit management, it could use EnvisionRX to acquire other small competitors.
Who benefits?
For Walgreens, the acquisition will lower production costs by more than $1 billion and it will expand the company’s role in the distribution of medications in the U.S.
The Rite Aid deal permits Walgreens to have the business of managing drug benefits for insurers and employers, in the area where its rival, CVS, is a leader. The approach of Walgreens, in both mature and newer markets across the world, is to advance and broaden the delivery of retail health, well-being and beauty products and services, and this is a step toward its global development and to continue its profitable growth strategy.
The deal will enhance Rite Aid's ability to meet the health and wellness needs of Rite Aid's customers and delivering significant value to its shareholders. Along with Walgreens Boots Alliance, the Rite Aid team can enhance its store base and expand opportunities as part of the first global pharmacy-led, health and well-being enterprise. The deal will also help to lower costs and increase leverage with suppliers.
Fourth quarter and 2016 outlooks
The company reported strong results for fourth quarter and fiscal year 2015 and it believes it can shape the future of health care around the world by its ability to bring global solutions to local communities, benefiting all participants, populations and stakeholders.
Due to the inclusion of Alliance Boots' consolidated results, net sales in the fourth quarter increased 49.7% compared to the same quarter a year ago. Adjusted net earnings per diluted share increased 14.3% to 88 cents compared with the year-ago period, beating analysts’ estimates. Walgreens’ pharmacies filled 222 million prescriptions in the quarter, which was up 4.6% from a year before.
For the fiscal year 2015 adjusted net earnings per diluted share grew by 18.3% and GAAP net earnings attributable to Walgreens Boots Alliance per diluted share increased 100% to $4.00, and net sales increased by 35.4%.
For the fiscal year 2016 it expects adjusted net earnings per share to be in range of $4.25 to $4.55 on a diluted basis, while in the fiscal year 2015 it was $3.88.
About Walgreens Boots Alliance Inc.
The company has a market cap of $94.24 billion and together with its subsidiaries operates drugstores in the United States. WBA provides consumer goods and services, pharmacy, and health and wellness services in communities across America. It also offers products and services through drugstores, as well as through mail, telephone, online and mobile application.
Profitability and growth has been rated by GuruFocus as 6/10. Returns are positive and well-above the average performance of the Global Pharmaceutical Retailers industry. ROE at 15.55% and ROA at 7.04% are outperforming the 75% of its competitors. Profitability is low, with operating margin at 4.45% and net margin at 4.04% but even so the performance is not amazing, both margins are ranked higher than 66% of its competitors.
Financial strength has been rated by GuruFocus as 4/10, and the current ratios such as cash to debt at 0.21, are underperforming 72% of the other companies in WBA’s industry while equity to asset at 0.45 has the same performance of other competitors.
GuruFocus rates the business predictability as 3.5 stars out of 5, and with a fair value of $46.38, the DCF calculator put the stock as largely overpriced, trading with a negative margin of safety of 90% at the current price of $88
The company is paying its shareholders a yield of 1.59% with a very comfortable payout ratio of 34%. The company has been increasing its yield since 1985 with a growth rate of 21.30% over the last 10 years and 18.80% in the last five.
The price of the stock has risen by 35% during the last 12 months and is now trading near its 52-week high, 33.67% above its 52-week low.
During the last quarter investors Ken Fisher (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Steven Romick (Trades, Portfolio) and the firm Vanguard Health Care Fund (Trades, Portfolio) reduced their stakes in Walgreens, while John Hussman (Trades, Portfolio) increased his stake by 50%.
The company's leading shareholder among the gurus is Andreas Halvorsen (Trades, Portfolio) with a stake of 2.26% of outstanding shares (7.86% of his total assets). He is followed by two firms, Jana Partners (Trades, Portfolio) which holds 1.26% of outstanding shares and Vanguard Health Care Fund (Trades, Portfolio) with 0.62%.
About Rite Aid Corp.
The company has a market cap of $8.24 billion and operates retail drugstore chain in the United States. Rite Aid operates its drugstores in 31 states across the country and in the District of Columbia. The company sells prescription drugs and an assortment of other merchandise, which it calls "front end" products.
Profitability and growth has been rated by GuruFocus as 4/10. Returns are positive and well-above the average performance of the Global Pharmaceutical Retailers industry. ROA at 21.75% is outperforming the 98% of its competitors. At current levels the company is having the best performance of its recent history; profitability is not so high, with operating margin at 2.76% which is ranked lower than 53% of companies in the same industry while net margin is at 7.11% and ranked higher than 90% of the companies in the RAD’ industry.
Financial Strength has been rated by GuruFocus as 7/10, but the current ratios such as cash to debt at 0.02 and equity to asset at 0.04 are underperforming the 98% of other companies in Global Pharmaceutical Retailers industry.
GuruFocus rates the business predictability as 1 star out of 5, and the DCF calculator gives the company a fair value of $28.76, meaning the stock is largely undervalued and is trading with a margin of safety of 71% at the current price of about $8.
The price of the stock has risen by 47% during the last 12 months and is now trading near its 52-week high, 52.70% above its 52-week low.
During the last quarter Ken Fisher (Trades, Portfolio) traded shares of Rite Aid selling out his stake.
The main shareholder among the gurus is now Larry Robbins (Trades, Portfolio) who holds a stake of 1.20% of outstanding shares, followed by the investors John Burbank (Trades, Portfolio) with 1.1% and Joel Greenblatt (Trades, Portfolio) with 0.31%.
