Walgreens Is Looking for a New CEO. Why That Could Make the Stock a Winner.

text size

Usually, the announcement of a CEO change at a struggling company brings optimism and perhaps a stock pop. No. b

Walgreens Boots Alliance
.

Shares fell after Rosalind Brewer announced her resignation effective September 1. If the company makes the “right” choice for a new leader, this could lead to a buyout opportunity.

Let’s face it. Walgreens stock (symbol: WBA ) is flat-out negative. While stocks were down 13 percent in September, that’s nothing new—they’ve lost two-thirds of their value in the past five years. The problems are wide-ranging: Growth has been slow, and it has missed acquisitions as a rival pharmacy benefits manager.

CVS Health

( CVS ), and its acquisition of physician practices has eroded profitability. With stocks so depleted, investors think the beer replacement will likely fail.

It will be difficult to turn the company around. Walgreens’ gross operating margin is expected to fall below 3% this year, down from more than 5% in 2018. Earnings per share for 2018 are expected to be $3.95, up from $6.01. The stock now trades at less than six times forward EPS estimates. year, of

S&P 500 Index
19 times.

Although the company has named a new CEO in the near future, this may prepare a pop in the near future. The market wants to see the healthcare professional lead the way as the retail business faces stiff competition from e-commerce players.

Amazon.com

( AMZN ) Walgreens’ strong health care offering could boost retail business as it puts some of its new doctor practices in stores.

“You may want a management team with a healthcare background,” said Evercore analyst Elizabeth Anderson. If you find someone with good knowledge of payers and value-based care, that will be seen positively.

The downside is that Walgreens’ health care business, which includes VladeMD, Shields Health Solutions and CCX Next, should be viable and profitable. It takes time. It lost money this year because of the fees a patient has to pay when they visit the hospital, Jefferies analyst Brian Tankulut said. Walgreens must figure out how to reduce health care costs, or the stock will remain under pressure and must reduce the gap.

The good news is that management said on its third-quarter earnings call that it expects its healthcare business to return to profitability next year, Evercore Andersen said. As those practices continue to grow patients and revenues significantly, the segment could reach profitability by fiscal 2025.

But these are long-term concerns. Currently, the company needs to name a CEO who can get behind the market. And if it does, Walgreens stock could be a short-term winner.

Write Jacob Sonenshine at [email protected]