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Walgreen has ‘ample upside with or without Rite Aid’

May 31, 2017

As Walgreens Boosts Alliance’s (NASDAQ: WBA) self-imposed deadline to complete the Rite Aid (NYSE: RAD) transaction approaches (July 9), Jefferies analyst Brian Tanquilut sees upside in the shares with or without a deal.

If the FTC moves to block the deal, Tanquilut doesn’t see WBA challenging the decision, and thinks management will likely pivot capital deployment toward share repurchases. “If WBA raises its share repurchase authorization to $5B (which we believe is reasonable given its FCF outlook and the excess cash it has generated since the RAD deal was announced) we believe the company could increase EPS by $0.17 (3%) & $0.46 (7%) in FY18 & FY19, respectively,” he commented.

Alternatively, if the FTC approves the deal EPS accretion should drive stock higher, he said. “While it is admittedly difficult to handicap the odds of an FTC approval of the pending WBA-RAD transaction, we believe it’s safe to assume that an approval would come with the requirement to divest >1,000 stores. We’ve updated our RAD accretion estimates as a result of the new merger deadline of July 31st and we now estimate that the $1B synergy opportunity translates to $0.47 in EPS accretion by FY2020, or 7% EPS accretion. Looking longer-term, we estimate that bringing Rite Aid up to 80% of Walgreen’s store productivity could add another $0.41 to EPS.”

Finality on RAD issue will serve as clearing event and WBA stock should once again trade based on its improving growth/fundamental, the analyst added.

The firm reiterated a Buy rating and price target of $95 on WBA.


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