Walgreen's Boots Alliance Recovery Takes Off Walgreen's Boots Alliance is breaking out to new highs following its FQ2 earnings release.

Walgreen's Boots Alliance Is Shedding Dead Weight

We started getting bullish on Walgreen's Boots Alliance (NASDAQ: WBA) about a year ago and have been getting more bullish as the quarters roll by. The company, long-plagued by dead weight, has been in the throes of a turnaround effort that is starting to pay off. The turnaround involves shedding a lot of that dead weight, moves that will continue to impact "total" operations over the coming year, but we are looking beyond that. The numbers for investors to focus on now are "continuing operations", the core of the business and the heart of the growth story.

Walgreen's Has Mixed Quarter With Surprising Leverage

Walgreen's Boots Alliance had a mixed quarter without a doubt but one that truly highlights the internal improvement in ongoing operations. The $32.78 billion in revenue is up 4.6% from last year but missed the consensus by 860 basis points. The bottom-line results, however, beat the consensus by a wide margin in evidence of widening margins and the company's newly-gained earnings leverage.

On a segment basis the U.S. operations, the largest segment, grew at a tepid 0.4% pace. The International operations, aided by the widening reopening of the economy, grew by 32.6%. As for earnings, the GAAP $1.06 beat the consensus by $1.17 while the adjusted $1.26 beat by $.13. Adjusted earnings grew by 8.7% from last year nearly doubling the pace of revenue growth. Looking forward, the company is expecting revenue gains to pick up in the second half and has upped the guidance because of it. Execs are now expecting FY earnings growth in the high-single digits to continue versus the slowing that was previously predicted.

The Walgreen's 3.5% Yield Is Safe

The company's newly found earnings leverage is being put to good use including shoring up the balance sheet. The company's cash position has more than doubled to $1.0 billion in the first half of the year and its debt is coming down which both serve to strengthen the company's dividend-paying abilities. The dividend is worth about 3.5% with shares trading near $56 and there is an expectation for growth here as well. The payout ratio is running in the 35% range with plenty of free cash to spare and there is a history of past increases that have the stock set up for a 7th consecutive increase in the 3rd calendar quarter of the year.

The Analysts Are Underestimating Walgreen's Boots Alliance

While the company is still in the process of reinvigorating growth the signs are more than promising. With the divestiture of Alliance Healthcare slated to close before the EOY fiscal 2021, we think the next year could be transformative for the business but the analysts have yet to respond. The current consensus target is about 17% below the current price action and that includes three recent price-target boosts that have the stock trading closer to fair value. Although there's been no upgrade yet, in our view, Walgreen's is on the verge of a major breakout and one that will be amplified by a round of analysts upgrades.

The technical outlook for the stock is very bullish. The Q2 release has price action up at the recent high and testing resistance at a 15-month high. The move not only confirms support at the short-term EMA but constitutes a strong buy-signal when combined with the MACD and stochastic. Both the MACD and stochastic are firing bullish crossovers in-line with the underlying trend that confirms today's move. The only thing left is for price-action to set a new high and we think it is only a matter of time. When that happens we see WBA moving up into the $60 to $65 range with more gains possible before the end of the calendar year.