Walgreens Gets Whacked by Amazon
You gotta hand it to Amazon.com (NasdaqGS: AMZN). It can gut an entire sector just by looking at it. Just ask Walgreens Boots Alliance (NasdaqGS: WBA), which dropped nearly 15% last month after rumors surfaced that Amazon is taking a hard look at getting into the online drug business.
Even if Amazon goes forward with the plan, experts figure that it will be two years before it starts making money. For that matter, it may decide not to get into that business at all.
That didn’t stop the Wall Street analysts that follow Walgreens from hitting the panic button as soon as Amazon entered the picture. In their eyes, Amazon can do no wrong and if it enters a sector then everyone else in that space is going to suffer as a result. That may be true, but Amazon’s entry into the drug delivery business is far from a done deal.
Amazon has not yet confirmed that it will move forward with it. But even if it does, there are a number of critical factors subject to change that could derail that plan. If President Trump has his way Obamacare will be replaced by an as yet unknown set of new rules. The FDA regulates drug sales and could revise its policies for online commerce at any time.
At the moment, none of that seems to matter. As long as Amazon is perceived as infallible, any company viewed as being in its path is at risk of being stampeded. But so far, the empirical evidence supporting that belief is sketchy at best.
Not So Fast…
When Amazon starting selling records and books many years ago, a lot of people thought that would be the end of bricks and mortar retailer Best Buy (NYSE:BBY). However, Best Buy changed its product mix and is now growing profits at a healthy clip. As a result, BBY’s share price has gained 50% during the past year after overcoming its Amazon scare.
I think the same thing will happen with Walgreens over the next couple of years. If Amazon announces it will enter the online pharmacy business then WBA may drop even further. But the drug store chain won’t just sit on its hands, waiting for Amazon to come knocking. Instead, it will do everything in its power to maintain its market share and compete with Amazon, just as Best Buy did.
And that’s just what Walgreens said it would do when it released its latest quarterly results on October 25. Not only did it report better earnings than expected, but it also increased its sales and profit guidance for next year. The stock jumped 4% that morning on the news, but shares are still a long way off their September levels.
Catch it on the Bounce
If you don’t already own Walgreens, here is why now may be a good time to buy it:
- Its purchase of nearly 2,000 Rite Aid stores is complete so the company can now focus on fending off Amazon;
- At a price of $65, WBA is valued at less than 11 times next year’s earnings which is low;
- WBA’s share price should jump if Amazon decides not to get into the pharmacy business.
I also expect to see a “yo-yo effect” play out across the entire stock market if a corporate tax cut isn’t enacted. Companies that pay a high tax rate will see their share prices drop since will get no relief, while those that already pay a low tax rate should benefit. In that regard, Walgreens should be fine given its low (sub-20%) effective tax rate.
Either way, WBA appears oversold and should recover a good chunk of the recent decline by the time it reports this quarter’s results in January. Like Best Buy it has its work cut out for it to defend against Amazon, but it has a two-year headstart and all of the resources necessary to defend its turf.