Still Neutral on Walgreens

We reiterate our Neutral recommendation on Walgreens (WAG - Analyst Report) following the first quarter fiscal 2013 results. While the company’s performance is showing signs of improvement, the current business environment is tough and keeps us on the sidelines.

Why the Reiteration?

On Dec 21, 2012, Walgreens reported adjusted earnings per share of 58 cents for the first quarter of fiscal 2013, significantly below the Zacks Consensus Estimate as well as the year-ago mark. Revenues also trailed the Zacks Consensus Estimate. Despite a lukewarm start to fiscal 2013, things are looking up with the company turning its fiscal 2012 headwinds into tailwinds for the ongoing fiscal.

The new contract with Express Scripts (ESRX - Analyst Report) boosts positive sentiment as traction in prescription sales at Walgreens continues with the return of customers. The introduction of prescription drugs in the generic market also supports our non-committal stance. While the generic wave has dragged sales over the last few quarters, the company expects the gross margin expansion on account of higher generic prescription drug sales to continue in the near term.

Notably, the company is undertaking strategic initiatives to revive growth. The Alliance Boots deal is expected to be accretive to Walgreens’ results in the future. Its Balance Reward customer loyalty program is expected to stimulate customer traffic. We anticipate that these ventures will support growth going forward. On the other hand, the tussle with players likes CVS Caremark (CVS - Analyst Report) to regain market share is a cause of concern. Additionally, macroeconomic conditions remain unyielding.

Following the first-quarter results, estimate revision trend reflects a divided opinion while the magnitude of the earnings estimate revision depicts a slightly positive bias for Walgreens. Accordingly, the stock carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

While we remain on the sidelines for this retail pharmacy chain, we look forward to CVS Caremark and BioScrip Inc. (BIOS - Analyst Report), both carrying a Zacks Rank #2 (Buy). Rite Aid Corporation (RAD - Analyst Report) carries a Zacks Rank #1 (Strong Buy).