Here’s Why Wall Street Has Turned Bearish on Walgreens

Wall Street has taken some tough action against Walgreens recently

Amazon’s (AMZN) acquisition of PillPack and the fears of rising competition resulted in a series of Wall Street downgrades of Walgreens Boots Alliance (WBA). Three analysts downgraded their ratings on the drug store giant in June, and another three downgraded the stock in July.

Here’s Why Wall Street Has Turned Bearish on Walgreens

In June, Bank of America Merrill Lynch lowered the company’s rating from “neutral” to “underperform.” Then Baird downgraded it from “outperform” to “neutral,” while Jefferies cut it from “buy” to “hold.” While analysts noted that Amazon’s PillPack acquisition is unlikely to have an impact on Walgreens in the near term, earnings might be affected in the long run. The downgrades will likely have a negative impact of Walgreens stock.

Jefferies analyst Brian Tanquilut said, “We believe that the NT earnings impact to WBA from AMZN’s acquisition of PillPack is likely immaterial, but the perception and concern that AMZN will successfully integrate PillPack into its consumer offering (1-2 years out) will likely weigh on WBA stock NT and potentially impact actual earnings performance LT.”

Who else has downgraded WBA?

Mizuho lowered Walgreens to “neutral” from “buy” in early July, citing high valuations in the face of rising competitive threats from Amazon, the lack of a clear strategy for competing in a consolidated industry, and a lack of revenue diversification.

Evercore ISI then downgraded the stock on July 10 to “in-line” from “outperform.” The Evercore analyst cited rising competition after Amazon’s PillPack acquisition, European Union fee pressure, and Brexit volatility as the key reasons behind the downgrade. On July 23, Cowen and Company downgraded Walgreens from “outperform” to “market perform.”

“We’re downgrading WBA to Market Perform, as we view it as poorly positioned in the move toward value-based care. We increasingly believe ownership (CVS acq. of AET) rather than partnership (WBA’s open health hub) is necessary to realize the benefits of cost trend improvements. Without such, we see WBA potentially marginalized as more of a distribution channel and at greater risk to disruption,” said analyst Charles Rhyee in a client note.