EUR 850.00 For Business Accounts Only

Morningstar | Walgreens Boots Alliance (WBA): Prescription for Growth; $68 FVE

We assign Walgreens Boots Alliance a narrow moat arising from cost advantage with a negative trend rating. We lower our fair value estimate to $68 per share from $73. We believe Walgreens will be able to leverage scale and foster beneficial partnerships to better utilize its stores, abate commodity pricing pressure, and offset negative reimbursement trends.

Walgreens is the leading pharmacy retailer with significant scale generating nearly $140 billion in revenue and dispensing over a billion prescriptions annually--a quarter of the market. The expansive infrastructure has strategically located store fronts in high traffic areas to generate over $13 million in sales per store, notably better than its closest peer CVS, at $8.6 million, and over double the pharmacy average of $6.5 million. Scale remains critical in an increasingly competitive market that has witnessed rationalization of subscale peers. The core business is centered around the pharmacy and accounts for nearly three fourths of revenue and is the main driver of traffic. The balance of the domestic business consists of front end retail, almost equally split between health, beauty and wellness in addition to commodity products. International and wholesale represent 10% and 18%, of the business and round out revenue. Management will need to pull through incremental volume both in the acquired Rite Aid locations and international stores.

Management has focused on leveraging scale to foster strategic partnerships to increase traffic and cross selling opportunities with a long-term focus to improve co-ordinated care. This concentration to improve store utilization addresses macro trend of localized community healthcare. Walgreens has incurred most of the operating and capital investments to successfully complete various strategic partnership trials and the successful roll out of these initiatives have not been incorporated into guidance and should offset any further reimbursement deterioration.