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Is a Beat in Store for Walgreens Boots (WBA) in Q1 Earnings?

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Walgreens Boots Alliance, Inc. (WBA - Free Report) is slated to release first-quarter fiscal 2018 results before the market opens on Jan 4.

Last quarter, the company had delivered a positive earnings surprise of 7.38%. It is noteworthy that Walgreens Boots has outperformed the Zacks Consensus Estimate in three of the preceding four quarters with an average positive earnings surprise of 2.46%. Let’s take a look at how things are shaping up prior to this announcement.

Why a Likely Positive Surprise?  

Our proven model shows that Walgreens Boots is likely to beat on earnings in the fiscal first quarter riding on the right combination of the following two key ingredients: 

Zacks ESP: Earnings ESP which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is +3.97%. This indicates a likely positive earnings surprise for the stock.

Zacks Rank: Walgreens carries a Zacks Rank #2 (Buy), which increases the predictive power of ESP. Note that stocks with a favorable Zacks Rank #1 (Strong Buy), 2 and 3 (Hold) have a significantly higher chance of beating estimates. Further coupled with a positive ESP, the combination makes us confident of an expected positive surprise.

We caution against the sell-rated stocks (#4 and 5) going into an earnings announcement.  

Key Catalysts

Notably, Walgreens Boots’ entire business has been posed with tough challenges during the fourth quarter of fiscal 2017 due to the devastating hurricane activity witnessed in the latter half of 2017. The company anticipates this lean patch to continue even in the first quarter of fiscal 2018 as the catastrophic event might adversely impact its overall business in Puerto Rico, where Walgreens Boost leads as the largest pharmacy chain.

 

 

Per Walgreens, the damages occurred to Puerto Rico's infrastructure, which grossly impacted trading on its stores so far, is expected to affected the adjusted earnings per share by a few cents in the first quarter of fiscal 2018. On the whole, the company expects adjusted net earnings per share in the range of $5.40-$5.70 in fiscal 2018.

Walgreens Boots' Retail Pharmacy USA division continued to witness comparable prescription growth as well as strength in retail prescription market. Several planned developments, early benefits of new pharmacy contracts as well as a volume increase from previously announced strategic pharmacy partnerships have been driving growth in this space over the past few quarters. We expect this growth momentum to continue in the fiscal first quarter as well.

However, the sales performance of the Retail Pharmacy international division continued to disappoint due to various factors including a decline across multiple product categories with beauty being hampered by the timing of product launches. Also, total retail sales were down on the impact of the previously announced closure of certain e-commerce operations.

Amid this drag in retail pharmacy business, we are looking forward to the company's agreement to purchase a limited number of Rite Aid stores, which might boost its business. While the transition process of these stores is underway, we believe this integration to help Walgreens Boots expand and optimize its retail pharmacy network in the key U.S. markets including the Northeast. However, we expect no material benefit to realize from this development till the first quarter closes.

Meanwhile, strong market growth is expected in certain emerging markets backed by the timing of price rise. Also, in order to expand footprint in Asia, the company launched its first Boots franchise store in South Korea earlier in 2017. This development is likely to contribute to the top line in the fiscal first quarter.

Other Stocks Worth a Look

Here are a few other medical stocks worth considering as they too have the right combination of elements to deliver an earnings beat this quarter:

Zynex, Inc. (ZYXI - Free Report) has an Earnings ESP of +5.88% and a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Merit Medical Systems, Inc. (MMSI - Free Report) has an Earnings ESP of +1.59% and a Zacks Rank of 1.

ICON Public Limited Company (ICLR - Free Report) has an Earnings ESP of +0.07% and is a Zacks #2 Ranked player.

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