Pioneer Investments (Trades, Portfolio) is a global investment management firm with presence in 28 countries worldwide. Last quarter, Pioneer Investment increased its position in Walgreens Boots Alliance (WBA, Financial) by buying 729,146 shares of the company. As of March 31, the firm was holding 733,355 shares of the company.
Walgreens recently reported strong results with adjusted second quarter net earnings per diluted share increase of 21.6%, second quarter sales increase 35.5%, and retail pharmacy USA division comparable store sales increase of 6.9 percent. The company announced fiscal 2015 full year adjusted net earnings guidance of $3.45 to $3.65 per diluted share, and reaffirmed fiscal 2016 adjusted net earnings per diluted share goal of $4.25-$4.60. Free cash flow totaled $1.0 billion in the second quarter and $1.7 billion in the first six months, while GAAP operating cash flow totaled $1.3 billion in the quarter and $2.3 billion in the first six months.
What is more interesting is the fact that the company expanded its cost restructuring program through fiscal 2017, building on a previously announced cost reduction initiative. Walgreens had announced in August 2014 a three-year, $1.0 billion cost-reduction initiative. After a rigorous analysis, the company has identified additional opportunities for cost savings, primarily in its Retail Pharmacy USA division. These additional opportunities will increase the total expected cost savings program by $500 million to a projected $1.5 billion by the end of fiscal 2017. Significant areas of focus include plans to close approximately 200 USA stores; reorganize corporate and field operations; drive operating efficiencies; and streamline information technology and other functions.
Analysts are optimistic about the company's cost saving plans. Recently, Citi analysts significantly raised their target price for Walgreens Boots Alliance Inc from $88 to $107. The analysts cited merger synergies from the Alliance Boots acquisition and cost savings benefits which could help the company post significantly faster earnings growth than its peers. According to analysts:
"ABC sourcing benefit increases more each year out, and the company has an ability to exercise a warrant for an additional 8% stake in ABC in March 2016, which is likely to be exercised based on the current favorable strike price. Thus, the company would likely receive equity income from the additional stake and with their two board seats, they could better align their interests in sharing the sourcing benefits.
If the company successfully executes on its target for AB synergies, as well as achieves $300mm incremental cost savings (out of the $1.5bn target by 2017), this would drive $0.43 of the step-up in FY16."
These cost saving actions and merger synergies means that Walgreens can continue to outperform its peers in term of EPS growth over the next few years, even if the broader macros are not that supportive. The company's EPS is expected to increase 21% next year driven by these cost saving actions. Walgreens is trading at a forward PE of 20.75x. The company has a dividend yield of 1.50%. Given the company’s good growth prospects and reasonable valuations, I recommended buying the stock.
