If ever there was a stock with a healthy business it's Walgreens Boots Alliance(WBA) - Get Report . This is a company that can put on a clinic on how to run a successful pharmacy business, which should show up in the company's second-quarter earnings Tuesday.
This stock is a holding in Action Alerts PLUS, the charitable trust managed by TheStreet's Jim Cramer and Research Director Jack Mohr. They recently wrote they "remain upbeat on its efforts to boost its higher-margin, front- end and branded products" and are maintaining a $95 price target. Shares currently trade around $84.
However, they stressed Walgreens is not a stock to trade going into earnings.
"In the face of several secular headwinds afflicting the industry -- including reimbursement pressure in pharmacy and traffic/margin issues at the front-end of its domestic stores -- the management team remains acutely focused on its strategic repositioning and is transitioning to a period marked by investments in the front end, improving efficiency/reducing costs, and positioning itself for new partnerships/transactions that serve to create value across its ecosystem," according to Cramer and Mohr. Walgreens "is not a near-term trade but rather a multi-year effort to optimize productivity and earnings while expanding its network."
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For the quarter that ended in February, analysts, on average, expect earnings per share of $1.28 on revenue of $30.66 billion, or growth of 8.47% and 15.4%, respectively. For the full year, ending in August, earnings are projected to climb 13% to $4.48 per share, while revenue of $119.56 billion would mark an increase of around 16%.
Shares are down about 2% for the year to date and 2% for the past 52 weeks, emphasizing Cramer's and Mohr's point about this being a longer-term holding. There is still uncertainty surrounding Walgreens' October merger proposal for rival Rite Aid(RAD) - Get Report , the No. 3 U.S. pharmacy retailer, for instance.
But in its fiscal first quarter, Walgreens' revenue surged almost 50% and its same-store sales rose 5.8%. There was an almost 5% rise in first-quarter prescriptions, helping pharmacy revenue climb 6.7%, which beat Walgreens' own forecast. The pharmacy division accounts for 70% of Walgreen's total revenue, which in the first quarter was $29.03 billion.
So Walgreens doesn't need Rite Aid to dominate its industry, especially as the baby boomer population ages and uses medical benefits provided by the Affordable Care Act.
The stock priced at just 16 times fiscal 2017 estimates of $5.03 per share, compared to a price to earnings multiple of 17 for the S&P 500 (SPX) index. So these shares are cheap. Whether they will be after earnings Tuesday is another matter.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.