Walgreens Boots Alliance, Inc. WBA is gaining from strong growth in the International segment, aided by the formation of the company's joint venture in Germany. The company exited first-quarter fiscal 2022 with better-than-expected results. However, pressure on margins and stiff competition do not bode well.

Over the past year, the Zacks Rank #3 (Hold) stock has gained 12.8% versus 30.4% growth of the industry and 23.5% rise of the S&P 500.

The renowned pharmacy-led health and beauty retail company has a market capitalization of $46.88 billion. Its earnings for first-quarter fiscal 2022 surpassed the Zacks Consensus Estimate by 24.4%.

Over the past five years, the company registered earnings growth of 3.3%, which compares to the industry’s 6.1% rise. The company’s long-term projected growth rate of 4.5% compares unfavorably with the industry’s growth projection of 6.1%.

Key Drivers

Q1 Upsides: Walgreens Boots exited first-quarter fiscal 2022 with better-than-expected earnings and revenues. Impressive performance by both the operating segments buoys optimism. Robust sales of Boots.com instill investor confidence. Strong growth in the International segment, aided by the formation of the company's joint venture in Germany, and solid growth in the United States segment are encouraging. During the fiscal first quarter, Walgreens administered more than 15.6 million COVID-19 vaccinations and 6.5 million COVID-19 tests. The continued acceleration of Walgreens’ omnichannel offerings and a rise in MyWalgreens membership are notable upsides during the quarter. Expansion of both margins is an added plus.

New Alliances Look Strategic: The intensifying competition in the U.S. retail drugstore market has compelled Walgreens Boots to diversify its product offerings. In November 2021, Walgreens Boots and McKesson entered into an agreement to acquire the remaining 30% share of their GEHE Pharma Handel (GEHE) and Alliance Healthcare Deutschland (AHD) joint venture. Following this transaction, Walgreens Boots will become the 100% owner of the combined GEHE and Alliance Healthcare businesses in Germany.

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Long-Term Growth Model Looks Encouraging: Over the next three years, Walgreens Boots expects annual adjusted earnings per share (EPS) core growth of around 4%, with flat growth in fiscal 2022 and acceleration each year after that, as Walgreens Health generates increasing returns.

Beyond fiscal 2024, the company’s long-term growth algorithm leads to adjusted EPS growth of 11-13%, as the faster growing and higher margin Walgreens Health achieves scale.

Downsides

Competition: Walgreens Boots faces significant competition in the retail drug store space from notable players like CVS Health Corporation CVS. Notably, the retail wing of CVS Caremark witnessed a record market share gain following the termination of the Walgreens-Express Scripts contract. While Walgreens Boots’ dull performance improves with customers' return, CVS management’s commentary on retaining most client wins raises concern.

Pressure on Margin Continues: In the last few years, the slowdown in the generic introduction has been affecting Walgreens Boots’ margins. In addition, of late, increased reimbursement pressure and generic drug cost inflation have been hampering Walgreens Boots’ margins on a significant level.

Estimate Trend

Over the past 60 days, the Zacks Consensus Estimate for its earnings has moved 2.4% north to $5.03.

The Zacks Consensus Estimate for its second-quarter fiscal 2022 revenues is pegged at $33.48 billion, suggesting a 2.1% rise from the year-ago reported number.

Key Picks

A couple of better-ranked stocks in the broader medical space that investors can consider are AMN Healthcare Services, Inc. AMN and Apollo Endosurgery, Inc. APEN.

AMN Healthcare, carrying a Zacks Rank #1 (Strong Buy), has a long-term earnings growth rate of 16.2%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 19.5%, on average. You can see the complete list of today's Zacks #1 Rank stocks here.

AMN Healthcare has outperformed its industry over the past year. AMN has gained 46.5% versus the 57.2% industry decline.

Apollo Endosurgery, carrying a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 7%. The company‘s earnings surpassed estimates in the trailing four quarters, delivering a surprise of 25.6%, on average.

Apollo Endosurgery has outperformed its industry in the past year. APEN has gained 50.4% versus the industry’s 4.8% fall.

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