Walgreens Stock: What to Expect from Its Q4 Earnings

  • Walgreens is scheduled to announce its fourth-quarter earnings on October 28.
  • The company’s low valuation and a significant decline in the stock could limit more downside.
  • Walgreens’ low growth rate could limit the recovery.

What to expect from Walgreens stock

Walgreens Boots Alliance (WBA) is scheduled to report its fourth-quarter earnings before the markets open on October 28. We expected a limited downside in Walgreens stock due to its multiyear low valuation. So far, Walgreens stock has underperformed broader markets this year. The stock has fallen significantly YTD (year-to-date), which reduces the downside risk.

However, analysts’ consensus estimate indicates low growth for the third quarter, which might not help the recovery process.

We expect Walgreens’ top-line growth to be low in the fourth quarter. Weakness in the US retail business and Boots UK will likely hurt the overall revenue growth. Meanwhile, continued reimbursement pressure and negative currency rates could hurt the company’s margins. We expect Walgreens’ bottom line to continue to decline in the fourth quarter.

In comparison, CVS Health’s (CVS) top line could continue to rise due to the Aetna acquisition. CVS Health’s revenues have increased about 35% in the first half of 2019. The company also beat analysts’ estimates by a wide margin during the last reported quarter.

We think that CVS Health’s bottom line will continue to benefit from the Aetna acquisition. However, the company’s bottom-line growth could decelerate due to the pressure on margins from higher reimbursements. Also, higher interest expenses and the increased outstanding share count could remain a drag.

Walgreens’ fourth-quarter estimates

Analysts expect Walgreens to post revenues of $33.91 billion, which implies growth of 1.4% YoY (year-over-year). Brand inflation and prescription volume growth will likely drive the company’s fourth-quarter revenues. However, less emphasis on tobacco sales, the store optimization program, and challenges in Boots UK will likely remain a drag

Analysts expect Walgreens to post an adjusted EPS of $1.41, which reflects a YoY decline of 4.7%. Higher reimbursement pressure will likely drag the company’s margins and EPS down. However, the lower tax rate and decreased outstanding share count should cushion the bottom line.

What’s in the offing?

Walgreens stock has fallen about 20% on a YTD basis as of Monday. The stock has lagged broader markets by a wide margin. The S&P 500 has risen 19.9% during the same period. The decline is Walgreens stock resulted in a lower valuation and higher dividend yield.

The stock is trading at a forward PE ratio of 9.1x, which is slightly lower than the peer group average of 10.2x. However, Walgreens is well below its average historical PE ratio of about 17.0x. The stock offers a dividend yield of 3.3%.

We think that Walgreens’ low valuation and healthy dividend yield lower the downside risk. However, the recovery might not happen soon due to low revenue growth expectations and continued pressure on margins. Notably, CVS stock is trading roughly flat on a YTD basis.