Although it was just seven years ago, in retrospect the world of 2015 seems a much more innocent and hopeful one: Leaders struck the historic Paris Agreement , ivermectin was a miracle drug that won its developers the Nobel Prize, and U.S. politics hadn't reached today's state of divisiveness. By contrast, today the clock is running out on climate change , ivermectin is the subject of dangerous conspiracy theories , and the U.S.
is polarized . Walgreens Boots Alliance (ticker: WBA) investors would likely prefer to return to 2015 as well: That's when the shares hit an all-time high of more than $95, a level that's been mostly far out of reach since, and more than double where it stands today, at a recent $39.50.
Deutsche Bank doesn't think the pharmacy giant can turn back time or climb near $90 again soon. But the shares are up 3.7% early Friday after analyst George Hill upgraded the stock to Buy from Hold, and boosted his price target to $50 from $41. That makes him one of just two bulls out of 17 analysts that cover the stock.
Hill's move comes after he met with management, including CEO Rosalind Gates Brewer and Chief Financial Officer James Kehoe, to discuss the company's recently announced purchase of urgent-care provider Summit Health-CityMD for $8.9 billion.
He writes that he came away with "increased faith in the company's ability to execute on its care-delivery strategy, which should lead to positive revisions and multiple expansion for Walgreens shares."
He writes that Walgreens, with Summit Health tucked into its portfolio, transitions into a broader consumer healthcare-services company, bolstered—instead of led by—its traditional pharmacy business. Hill notes that the deal is popular with shareholders, and believes that Walgreen's "future state as a healthcare-services provider" will allow it to deliver better-than-anticipated earnings growth: His own fiscal 2023 and 2024 earnings-per-share estimates are head of consensus expectations.
That may well be the case, but the question remains if investors need rush to pile into a stock that's gone nowhere for years, but has shot up more than 21% in the past month, double the S&P 500's rise.
Between the upgrade and Thursday's massive rally, Walgreens shares are up more than 7% in the last two days alone. Trading at 8.7 times forward earnings, the shares still don't look particularly pricey, and are still below their five-year average of 9.4 times, but investors happy with the acquisition could have bought Walgreens for 8.5 times on Monday—even if they waited to buy at the end of the day, after the shares had rallied more than 4%.
Walgreens stock hasn't traded above $50 since the start of the year, and even if a blue sky scenario plays out, it might not get back there in a hurry.
Hill himself notes that while Walgreens wants the Summit Health deal to help it streamline its structure as a newly minted healthcare services company, loose ends abound. It could take some two years for the company to unwind its roughly 20% stake in AmerisourceBergen (ABC), it still owns more than 14% of Option Health Care (OPCH) despite recent stock sales, and it has been unable to unload its Boots business. (The stock is down 35% since its Boots merger closed on the last day of 2014; the S&P 500 is up 90% over the same timeframe.)
"Walgreens management insists that their goal is to simplify the organization, and they are likely to get there, but we believe this simplification is years away," he writes.
Nor are those years likely to be particularly good for its pharmacies, which the company doesn't expect will be able to return to pre-Covid margin levels.
"Regardless of Walgreens' future aspirations, there is no escaping the pressure on their core pharmacy business is not going away," Hill notes.
Still, for those willing to wait it out Walgreens does offer a dividend yield of nearly 5% for their patience. And ultimately Hill's bullish call may be right; there's no doubt that the Summit Health deal is transformational, and it's certainly the way the industry seems to be moving, given recent deals by CVS Health (CVS) and even Amazon.com (AMZN). Nor is a bet prohibitively pricey even today, compared with the S&P 500's forward multiple above 17.
However, his upgrade comes with plenty of caveats, and it requires Walgreens to wade through a series of messes of its own creation. Investors who believe the turnaround story is finally taking shape are likely to get another chance to scoop up the shares, and don't need to jump into this week's big pop.