Amazon Pharmacy Causes Headline Risk for Walgreens

The long-awaited launch of Amazon AMZN Pharmacy is anticipated to create headline risk for Walgreens WBA in the near term. We acknowledge this to be an incremental headwind, but we view Walgreens as somewhat insulated as it remains a market leader addressing immediate care needs with ease of pickup and comprehensive offerings. We do not anticipate Amazon will garner a notable share of the market; rather, it is likely to pose a more immediate threat to dispensers of treatments for chronic conditions, such as mail order, and also to independent pharmacies, which face challenges to survive in a fiercely competitive market. Historically, Amazon’s competitive pricing on consumer products has adversely affected Walgreens' front-end sales, which have stabilized and started to improve with the latter company's aggressive rationalization of stock-keeping units and strategic initiatives.

Walgreens' strategy has focused on leveraging its partnerships to drive more traffic to its convenient locations. Through its infrastructure investments and partnerships, Walgreens has started to address more comprehensive care, including lab, imaging, and regular physician visits through its partnership with WebMD. Though it's in the early stages, this approach will allow the company to focus on outcomes longer term, which we view to be critical in improving wellness and providing differentiation in a fiercely competitive market. Additionally, convenience and ability to dispense more-complex drugs will be an important differentiator with the rise of specialty drugs that require special handling and consultations. Further, in the current market with notably low Treasury rates, Walgreens’ 4%-plus dividend yield remains an attractive consideration. We maintain our narrow moat rating and $42 fair value estimate for Walgreens.

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