Credit Suisse Needs Better Visibility Into Walgreens Earnings Growth

Walgreens Boots Alliance Inc WBA reported weak operating results for the fiscal first quarter. However, the company’s operating underperformance was offset by a favorable tax rate and some acceleration in cost savings, according to Credit Suisse.

The Analyst

Credit Suisse’s AJ Rice maintained a Neutral rating on Walgreens Boots Alliance, with a price target of $60.

The Thesis

Although Walgreens Boots Alliance’s quarterly performance was impacted by disappointing growth in US pharmacy script volume and competitive pressures, management maintained their full-year outlook, Rice said in the note.

He mentioned that Walgreens Boots Alliance recorded a 15% year-on-year decline in operating income, with US pharmacy script volume rising only 2.8% in the fiscal first quarter, versus the company’s full-year projection of around 4%.

The company cited competitive pressures in Medicaid and Medicare Part D as among the reasons for the disappointing performance. Management indicated that reimbursement pressures were in-line with the company’s budget and that the gross margin contraction was anticipated.

Rice also noted that management expects a reacceleration in script growth to 3.5%-4.5% in the second half of the year. He further pointed out that the company had a strong relationship with UnitedHealth Group Inc UNH in the Medicare Part D space, which management believes could drive overall script growth in the year.