NEW YORK (TheStreet) –- Walgreens (WAG) has been one of the most disappointing stocks in the second half of 2014, having fallen 17% since mid-year. But the Deerfield, Ill.-based drugstore chain could once again excite investors when it reports fourth-quarter earnings on Tuesday. Positive commentary by Walgreens on issues impacting its business such as health care reimbursement rates and generic drug price inflation could significantly shore up Wall Street's confidence as the company closes its acquisition of European pharmacy giant Alliance Boots.
So far, Walgreens acquisition of Alliance Boots has been a messy process and analysts and investors still don't have a handle on what type of earnings or valuation to expect out of the combined company. Analyst estimates and Walgreens own internal financial forecasts indicate expectations for the company could move higher as clarity sets in and Walgreens transforms itself into an international powerhouse that will be the largest buyer of pharmaceutical drugs globally.
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Deutsche Bank analysts believe Walgreens will provide a meaningful update on Tuesday. If the company's guidance gels with bulls like Deutsche Bank, it could turn investor conversation back to the expected synergies and growth opportunities presented by the Walgreens-Alliance Boots deal and other recent moves, such as a partnership with Amerisource Bergen (ABC) .
"We believe there is the potential for earnings estimates to increase if management has overestimated the long-term margin pressure or increases cost savings," Deutsche Bank said of Walgreens outlook in a Sept. 19 note. Shares of Walgreens were gaining 0.5% to $61.40.
Changing the Conversation
In early August, Walgreens sharply cut forecasts for the company's earnings in 2016 as it absorbs Alliance Boots, in a disclosure that sent the company's stock tumbling to multi-year lows.The company forecast between $126 billion and $130 billion in sales by 2016, and earnings of between $4.25 and $4.60 a share. Those figures amounted to an about 20% cut from Walgreen's initial targets for its Alliance Boots deal in 2012.
CEO Gregory Wasson and Alliance Boots head Stefano Pessina blamed Walgreens new guidance on a changing reimbursement landscape and generic drug price inflation. Analysts were left scratching their heads with some calling the guidance "shocking" and "extremely disappointing," while others viewed the disclosure as evidence of deterioration in the company's business.
Nonetheless, analyst estimates betray optimism for the combined operation, which will be renamed Walgreens Boots Alliance.
Walgreens is forecast to earn $127 billion in revenue and $4.58 in adjusted EPS by 2016, according to analyst estimates compiled by Bloomberg. Forecasts for 2015 are less clear. Internal projections from a recent SEC filing indicate company could earn $4.03 in 2015 EPS; however, that figure assumes the close of the Alliance Boots deal on Sept. 1. The deal is now forecast by the company to close in the first quarter of 2015.
Investor Outcry Could Cool
As Walgreens worked to close its Alliance Boots deal in two steps, the company came up against vocal hedge fund investors in 2014. In April, Jana Partners and other funds back-channeled with Walgreens to have the company consider dramatic management, board and operational change. The hedge fund also called for Walgreens to consider a so-called inversion that would shift the company's headquarters abroad for tax savings.