Analyst Glen Santangelo raised his rating on Walgreens (ticker: WBA) to Buy from Neutral, and established a $55 price target. He writes that the drugstore chain, while still facing plenty of headwinds, is “shifting from value trap to value opportunity.”
The trap part of the equation has been hard to escape: Santangelo notes that the stock is down some 38% since the start of 2018, while the
has soared 43% in that time. Pressure on reimbursements have weighed on the pharmacy side of its business, while rising e-commerce competition has squeezed its front-of-store retail operations. He thinks that these structural challenges will remain for the industry as a whole.
Yet even with these challenges, he argues that things are finally looking up, and that for the “first time in a while, we believe Walgreens is positioned for an upward earnings revision cycle in consensus estimates,” leading him to put his fiscal 2021 to 2023 estimates ahead of the Street.
Santangelo writes that the company’s sale of its pharmaceutical wholesale business, along with ongoing free cash flow strength, has given Walgreens more capital to deploy. In addition, he doesn’t think that a leveraged buyout scenario is “obvious,” but he admits that it could be a source of support for the stock’s valuation going forward.
Combined with a dividend yield above 4%, and a reduced debt profile, he thinks it’s finally time for value-oriented investors to buy the stock, despite headwinds and the ongoing near-term risk of Covid-19 disruption.
The move comes after Walgreens last week reported its biggest earnings beat in years.
Walgreens stock is up 3.6% to $46.83 in recent trading. They’ve jumped 17.4% since the start of the new year.
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