Walgreens should get a boost from vaccine, testing, says Mizuho analysts

Walgreens should get a boost from vaccine, testing, says Mizuho analysts

Mizuho analysts say that Walgreens Boots Alliance Inc. should get a boost from demand for vaccine administration and at-home testing with COVID 19 infections reaching peak levels.

Walgreens WBA, reported first quarter results that beat expectations last week, and raised its full-year outlook. The pharmacy retailer has created a new healthcare reporting segment for its growing primary care business, Walgreens Health.

We believe COVID 19 testing will remain strong in FQ 2: 22 and that Walgreens'target is achievable given the recent spike of the Omicron variant and strong demand for home tests, said Mizuho Securities analysts in a note.

More Americans are in hospital with COVID 19 than in the winter peak, and WHO warns that more than half of Europe could be infected by omicron within a few weeks.

Walgreens Chief Executive Rosalind Brewer said on the company's earnings call that it had administered 56 million COVID vaccines as of last Monday.

According to a FactSet transcript, Walgreens began offering COVID vaccine boosters in September and to-date, we have administered over 9 million doses.

More than 22.9 million COVID tests have been completed to date, and our testing and diagnostics business has accelerated. We are building on this platform because we are developing a wider range of testing and diagnostic solutions for our customers, and we will continue to grow this vital service as part of our pandemic effort. The vaccine company administered to children in the U.S. ages 5 to 11 in November 2021.

Chief Financial Officer James Kehoe says the company expects to get 30 million vaccines this year, up 5 million from previous guidance. Of that total, 19 million are expected to be boosters and 2 million to 2.5 million will be pediatric vaccines.

Kehoe said that earnings per share contribution from testing and vaccines is probably the biggest driver in the first quarter.

It is probably in the range of $0.12 to kind of $0.15 on the full year. I give you a full year number. It is $0.09 on vaccines and testing, $0.12 to $0.15. It is a great contribution to the full year. Walgreens raised its full-year adjusted EPS guidance to low-single digit growth from flat previously. The FactSet consensus is for EPS of $5.02, a 2.2% increase.

There is likely upside to the guidance. Every 1 million additional COVID vaccines will bring adjusted EPS of $0.02 to FY 22, according to Mizuho.

We view Walgreens strategy and execution to turn Walgreens Health into revenue and earnings growth engines as a key driver of stock performance. UBS analysts were surprised that the stock didn't react favorably to the results.

Walgreens shares closed down nearly 3% on Thursday when the results were announced. Walgreens shares have gone up 13.5% over the past year. The S&P 500 index SPX has gained 23.4% for the period.

The guidance increase is a little underwhelmed for investors.

Management did admit that it was still early in the fiscal year and we believe they are conservative, analysts said.

We believe Walgreens'stock will trade on the successes of the Health business, how well it integrates its recent acquisitions and the growth and margins it can achieve. Will this wave of COVID 19 lead to herd immunity? Are you less likely to get sick if you had omicron? Why is this milder variant a double-edged sword?

There is a strong quarter, but margins are likely to be pressured through the remainder of the year as vaccine and testing profits are likely to peak in 1 H 22 due to seasonality and competition from the Biden administration re: 500 million at home tests, analysts said.

The reimbursement headwinds and a $120 million labor headwind will remain structural issues at the same time.