This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Investors Shun Bed Bath & Beyond, Walgreens Growth Deals

Stocks in this article: BBBY WAG CPWM CVS ESRX

The risks are big for Walgreens, as people question how big its earnings drop will be in the U.S. and whether pushing into European healthcare, which is funded by cash strapped governments, is mistimed.

The company will pay $6.7 billion in cash and stock for the 45% stake in Alliance Boots and will have the option to buy a remaining 55% stake for $9.5 billion. That prospective $16.2 billion takeover valuation also comes with roughly $11 billion in Alliance Boots debt after its 2007 private equity buyout.

But after the deal, expectations of zero growth at Walgreens may be too low. " Walgreens is currently priced for moderately lower EBITDA margins 6.9% with 0% top line growth over the longer term. These growth expectations appear low," wrote Credit Suisse analyst Bhumika Gashti, in a note that highlights Alliance Boots higher than industry average earnings and margins.

Gashti says that at current share prices, Walgreen's risk and reward "appears compelling." The deal will hinge on whether Walgreens can achieve single digit profit growth at Alliance Boots, the analysts noted.

In Thursday afternoon trading, Walgreens rose slightly to $29.27, pushing shares slightly off 52-week lows. Year-to date, the company's shares are off over 11%, underperforming double-digit stock gains by competitors Express Scripts and CVS.

In fearful time for capital investment, investors who want to put their money behind corporate risk takers may do well to take note of recent moves by Warren Buffett and activist investor Jeffrey Ubben.

Despite calls by investors like Whitney Tilson for Buffett to increase share buybacks at Berkshire Hathaway (BRK.A), the "Oracle of Omaha" recently indicated that he's drawn his elephant M&A guns in search of a $20 billion deal.

Meanwhile, Ubben of ValueAct Capital recently told TheStreet that he's investing in turnaround and growth efforts at companies like Adobe (ADBE) and Valeant Pharmaceuticals (VRX), which hinge on M&A.

"We're always fighting the last war in this age of austerity. The problem is that like people don't trust the government, they don't trust their companies," said Ubben in May.

A continued M&A lull and investor reactions to recent large-deals by Walgreens and Bed Bath & Beyond signals continued skepticism of C-suite aggression. However, investors with a contrarian bent may want to consider that the deals could eventually pay off.

Investors can also choose to invest in other M&A models. Starbucks (SBUX) chief executive Howard Schultz is jazzed up about a strategy to attach big investments and expectations to relatively small sized acquisitions, mirroring IBM's (IBM) growth plan.

-- Written by Antoine Gara in New York.

3 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,317.95 -98.90 -0.57%
S&P 500 2,008.45 -12.80 -0.63%
NASDAQ 4,663.1390 -20.2680 -0.43%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs