Citi: Buy Walgreens' Core, Rite Aid Is A Bonus

• Walgreens Boots Alliance Inc WBA shares have been volatile over th past month, and are down 9 percent since January 4.
• Citi’s Alvin C Concepcion maintained a Buy rating for the company, while reducing the price target from $111 to $88.
• The company’s current stock valuation does not reflect the true potential of its core business, Concepcion stated.

Analyst Alvin Concepcion mentioned that Walgreen Boots’ current stock valuation does not reflect the earnings growth potential of the company’s core business. He expects the business to record 13 percent EPS growth going ahead, driven by an expansion of its US retail margin opportunity as well as benefits derived from deal synergies and cost cutting.

While Walgreen Boots’ recent earnings have been robust, its results in the near future are expected to be negatively impacted by a potentially weaker flu season and unfavorable forex changes. Concepcion added that the company’s current stock valuation reflects these headwinds to some extent.

The potential acquisition of Rite Aid Corporation RAD and resulting synergies are likely to boost Walgreen Boots’ EPS growth and valuation. The analyst expects the deal to be 10-15₵ accretive to EPS in FY17 and 38-45₵ accretive in FY18.

“As with any acquisition, there are considerable risks, and the one at the top of our mind is the significant store overlap between WBA and RAD on the East and West coasts. This could result in FTC requirements to close a significant amount of stores (beyond the 500 stores WBA expects), which can affect accretion,” the Citi report added.