Baird Upgrades Walgreens Boots, Expects Turnaround Of 'Train Wreck' Performance

Shares of pharmacy retailer Walgreens Boots Alliance Inc WBA ended 2020 lower by nearly 30%, but Baird sees several catalysts for the company that it said should put an end to years of "train wreck" performance.

The Walgreens Analyst: Eric Coldwell upgraded Walgreens from Neutral to Outperform with a price target lifted from $41 to $55.

The Walgreens Thesis: Walgreens reported Thursday with first-quarter 2021 results that "weren't good" but still "much better" than expected, Coldwell said in a Monday upgrade note.

The retailer's second-quarter outlook could have been worse, and growth should "accelerate handsomely" in the May quarter as COVID-19-related comp headwinds improve, the analyst said. 

The bullish case for Walgreens is also based on Thursday's announcement that the company will divest its pharmaceutical wholesale business to AmerisourceBergen Corp. ABC, he said.

This will generate $6 billion in net cash that Walgreens can redeploy on its business along with accelerating the pace of investments and turnaround initiatives, Coldwell said, adding that the agreement will also help synergize the ongoing partnership with Amerisource.

Related Link: Benzinga's Top Upgrades, Downgrades For January 11, 2021

Walgreens "gets little credit" for its portfolio of investments in public and private companies, the analyst said.

Some of these include a $1-billion stake in VillageMD, a $416-million investment in GuoDa in 2018 that likely more than doubled and Option Care, which he said could also be worth $1 billion.

"We are not capable of assessing precisely how much is currently captured in WBA's enterprise value, but logic would dictate that the Street may still be undervaluing the positions."

Finally, Walgreens stock is trading at just nine times P/E, while its P/E on a next-12-months basis represents a 60% discount to the S&P 500 index versus a long-term average multiple discount in the mid-single digits, according to Baird. 

WBA Price Action: Shares of Walgreens were trading higher by 3.27% at $46.69 at last check Monday.