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Unlocking Potential: Walgreens Seeks New CEO, Boosting Stock Prospects

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Walgreens CEO Change Presents Buying Opportunity

Introduction

Usually, the announcement of a CEO change at a struggling company brings optimism and maybe even a stock pop. Not for Walgreens Boots Alliance. Its shares have tumbled since Rosalind Brewer announced on Sept. 1 that she was stepping down. That could present a buying opportunity if the company makes the “right” choice for a new leader.

The Hated Walgreens Stock

Let’s face it. Walgreens stock (ticker: WBA) is flat-out hated. While shares have slumped 13% in September, that’s nothing new—they have lost two-thirds of their value over the past five years. The problems are wide-ranging: Growth has been sluggish, it missed out on buying a pharmacy-benefits manager the way competitor CVS Health has, and its pivot to buying physician practices has dragged down profitability. With the stock down so much, investors apparently think Brewer’s replacement will probably fail too.

The Challenges Ahead

Turning the company around will be tough. Walgreens’ total operating margin is expected to have fallen to just under 3% this year from just over 5% in 2018. Earnings per share are expected at $3.95 from $6.01 in 2018. The stock now trades just under six times EPS estimates for the next year, a mere fraction of the S&P 500 index’s 19 times.

The Need for a Healthcare Expert

That could set up a pop in the stock in the near term, if the company names a new CEO soon. The market wants to see a healthcare expert take the helm because the retail business faces stiff competition from e-commerce players like Amazon.com. A strong healthcare offering could revive the retail business since Walgreens is placing some of its new doctor’s practices in stores, potentially turning those patients into shoppers.

The Importance of Healthcare Background

“They may want a management team that has a healthcare background,” says Evercore analyst Elizabeth Anderson. “If they get somebody who has good knowledge of payers and value-based care, that would be viewed positively.”

Challenges in the Healthcare Business

The rub is that Walgreens’ healthcare business, which includes VillageMD, Shields Health Solutions, and CCX Next, has to be viable—and profitable. It will take time. It has lost money this year because of payouts it has to make when a patient visits the hospital, explains Jefferies analyst Brian Tanquilut. Walgreens will have to figure out how to drive its healthcare costs down, or the stock will remain under pressure and it may have to cut its dividend.

Expectations for the Healthcare Business

The good news is that management said on its third-quarter earnings call that it expects the healthcare business to move closer to profitability next year, Evercore’s Anderson says. As those practices grow patients and revenue aggressively, the unit could get to profitability by fiscal 2025.

Conclusion

But those are longer-term concerns. Right now, the company just needs to name a CEO the market can get behind. And if it does, Walgreens stock could be a short-term winner.

Write to Jacob Sonenshine at [email protected]


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