Why Walgreens Is A Buy, Regardless Of Rite-Aid Deal

Walgreens Boots Alliance Inc (NASDAQ: WBA) and Rite Aid Corporation (NYSE: RAD) shareholders have been in limbo in recent months, as they wait to see whether the proposed merger of the two drugstore chains will be approved by regulators. Earlier this month, FTC commissioner Terrell McSweeny said the FTC sees a “troubling decrease in competition” that could result from the merger.

According to Jefferies analyst Brian Tanquilut, Walgreens investors shouldn’t be sweating the FTC decision. Jefferies has upgraded the stock from Hold to Buy with or without a Rite Aid deal.

“While we recognize the risk from the RAD deal, our view is that downside from current levels is fairly modest at ~7 percent given our expectation that mgmt. would backstop its shares with a $2+ billion buyback should the deal fall through,” Tanquilut explained.

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Jefferies notes that the market doesn’t seem to fully appreciate Walgreen’s 7 percent-plus FCF yield. In addition, management has a track record of putting that cash to good use.

Tanquilut also praised the company’s Prime Therapeutics and TRICARE partnerships. He estimates that the two deals could add $0.14 in incremental EPS for Walgreens next year.

Finally, Tanquilut points out that Walgreens has reduced its G&A rate by 1 percent in the last two quarters and seems to be on track for its goal of $1.5 billion in long-term spending cuts.

Jefferies has also raised its price target for Walgreens from $87 to $95.

At last check, Walgreens was down 0.24 percent at $78.12, while Rite Aid was down 0.78 percent at $7.01.

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