Jefferies Downgrades Walgreens On Amazon's Competitive Threat

Walgreens Boots Alliance Inc (NASDAQ: WBA) suffered a blow Thursday when Amazon.com, Inc. (NASDAQ: AMZN) announced its official foray into the pharmacy business.

The retailer’s stock plunged on the news, and while Jefferies backed investor sentiment, it measured a higher Walgreens valuation than the pullback ultimately yielded.

The Rating

Analyst Brian Tanquilut downgraded Walgreens from Buy to Hold and cut the price target from $85 to $65.

The Thesis

The new competitive landscape compounds weakness in Walgreens’ quarterly comps, and the aggregate negatives are seen to offset benefits from the $10-billion buyback program Walgreens announced Thursday.

“AMZN's acquisition of mail order pharmacy PillPack has enlarged the overhang on the retail pharmacy space, which would prevent both WBA and CVS Health Corp (NYSE: CVS) from seeing meaningful stock upside near-term,” Tanquilut said in a Friday note.

Jefferies projects that Walgreens will feel “immaterial” near-term earnings impact given PillPack’s small market share, but Amazon’s potential to integrate PillPack within the next few years could weigh on future earnings.

Walgreens’ efforts to push retail pharmacy into health care services should drive long-term value, Tanquilut said. Improvements in general and administrative expenses, Rite Aid Corporation (NYSE: RAD) contributions and strong free cash flow are also expected to aid the Walgreens thesis.

Price Action

Shares closed down 9.9 percent Thursday and continued down marginally premarket Friday. At the time of publication, the stock was valued around $59.70. 

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