The race for the U.S. presidency is all set, sorry Berniecrats.
It will be big government loving, former Secretary of State Hillary Clinton against king of the bankruptcy courts Donald Trump. I think what is likely to be a bloody backyard brawl in American politics over the next six months will have a noticeable impact on global equities markets. Heck, I am starting to wonder if recent weakness in Chinese equities reflect concern on a potential Trump presidency (note this tepid price action also has me watching transport stocks, which have oddly remained resilient of late despite a U.S. economy that is surprising to the downside). But no matter the theater that is all but inevitable to play out (it has already started), there are likely to still be many non-defensive stocks that perform well, due to firm-specific reasons.
I think Walgreens Boots Alliance (WBA) will prove to be one of those names. If Clinton starts pulling ahead of Trump in the polls, it could provide a nice boost to Walgreens, given the former First Lady is a champion of upending healthcare to ensure everyone gets care (even if the government has to foot the bill). If Trump begins leading in the presidential polls, I sense it will be more due to his continued attacks on Clinton's track record and tough stance on global trade, than ObamaCare. In reality, a President Trump can't do squat about ObamaCare, which he will quickly learn within the first month of his presidency.
Shares of Walgreens have been an under-performer this year, more so on company-specific factors than anything happening in the elections. The stock is down about 7%. One factor has been the unknown surrounding the acquisition of Rite Aid Pharmacy (RAD), which is supposed to close before the end of the year. With the Staples (SPLS)/Office Depot (ODP) deal blocked by anti-trust regulators, the market is right to be concerned if the already huge Walgreens grows bigger by gobbling up Rite Aid and potentially triggering anti-trust concerns. Other challenges to Walgreens' story include a weak flu season, as well as the optics of the company's GAAP earnings. Walgreens is under pressure due to the continued integration of Boots Alliance and Duane Reade. Lastly, I think investors are having a hard time understanding the company. The CEO doesn't do a great job selling the sizzle and isn't very visible.
Nevertheless, I think the company has more earnings power than the market is baking into the stock. The healthcare market is likely to remain resilient for the foreseeable future, thanks to the one-two punch of aging baby boomers and the increased number of insured Americans, thanks to ObamaCare.
Walgreens has an enviable position.
It runs 8,170 drugstores across 50 states. Despite a weak flu season, its drugstores have logged solid same-store sales relative to other brick-and-mortar retailers over the past year.
The company handles over 68 million visits to its various websites each month. That's insane. My takeaway is that it has a very loyal customer base and, unlike many other retailers, it's doing something very right on the digital front, as well as with its accompanying services in its stores.
Approximately 76% of the population in the U.S. lives within five miles of a Walgreens, or Duane Reade. I think this is incredibly important. As baby boomers age, it will be difficult for them to trek out to a Walmart or Target, which may be further away, to get their prescriptions filled. The addition of Rite Aid would only strengthen this stranglehold on the pharmacy business.
The company has generated about $630 million in cost synergies related to its integration of Boots in the past six months, and continues to be on track to deliver $1 billion in total synergies by the end of the year. I think the market is forgetting how much cost Walgreens is pulling out of its newly formed behemoth of a company ¿ it's likely to be positively surprised over the next two years.
I like how the company is reinventing its stores, which is something I am not seeing at rival CVS Health (CVS). Walk into any Walgreens, or Duane Reade, and you are now likely to see scores of higher margin beauty products, prepared foods and private label brands. As those efforts are brought to more stores, the company will likely see stronger comparable store sales and profit margins.
Anyone doing well right now in the hyper-competitive U.K. retail market gets my attention. Walmart is doing horribly there, for instance. The company's Boots chain continues to be a solid performer in its home market of the U.K.