With Rite Aid Uncertainty Behind It, Could Walgreens Go Shopping?

For more than two years, pharmaceutical giant Walgreens Boots Alliance Inc WBA has been "tap dancing horizontally" with smaller rival Rite Aid Corporation RAD. In the end, Rite Aid agreed to sell Walgreens 1,932 of its stores in a $4.4-billion deal that now frees up Walgreens to potentially pursue other acquisitons. 

The Analyst

Deutsche Bank's Glen Santangelo initiated coverage of Walgreens Boots' stock with a Hold rating and $78 price target.

The Thesis

The competitive landscape in the pharmaceutical and retail space implies that standing still is not a viable option, Santangelo said in the initiation note. (See Santangelo's track record here.)

Walgreens' management team acknowledges and recognizes this reality and publicly commented multiple times that the U.S. pharmaceutical supply chain needs to be vertically integrated to lower costs and increase efficiency, the analyst said. 

The deal with Rite Aid is a step forward for Walgreens to improve its structure, but the "watered down" outcome did act as a destruction at a somewhat expensive cost, Santangelo said. At its core, the deal does represent a new tailwind for growth, he said. 

Looking forward, Walgreens' could seek a more aggressive acquisition and look to vertically integrate or at the very least partner with others in the supply chain channel, according to Deutsche Bank. The company is backed by sufficient cash flow and balance sheet flexibility, as well as a management team that "thinks strategically" and won't shy away from remaining aggressive, Santangelo said. 

The analyst's Hold rating is mostly related to industrywide challenges that are impacting both the U.S. and international retail businesses, which are showing subpar growth rates, according to Deutsche Bank. 

Price Action

Shares of Walgreens were trading lower by more than 1 percent Monday afternoon and are down nearly 15 percent since the start of 2017.

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