Walgreens is on the lookout for a brand new CEO. Why may this inventory make a winner?

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The announcement of a CEO change in a struggling firm often brings optimism and even perhaps a inventory rally. Not for

Walgreens Shoe Alliance
.

Its shares have fallen since Rosalind Brewer introduced her resignation on September 1. This might characterize a shopping for alternative if the corporate makes the “proper” alternative of a brand new chief.

Let’s face it. Walgreens inventory (inventory image: WBA) is totally hated. And whereas the shares fell by 13% in September, that is nothing new, as they’ve misplaced two-thirds of their worth over the previous 5 years. The issues are widespread: development has been gradual, and it has failed to purchase out a pharmacy advantages supervisor like rivals.

CVS Well being

(CVS) and its pivot to purchasing doctor practices has resulted in decrease profitability. With the inventory down a lot, traders appear to imagine that Brewer’s substitute will possible fail as nicely.

Altering the corporate’s course might be troublesome. Walgreens’ gross working margin is predicted to fall to simply beneath 3% this yr from simply over 5% in 2018. Earnings per share are anticipated to return in at $3.95 from $6.01 in 2018. The inventory now trades slightly below six instances earnings per share estimates for the subsequent yr, only a fraction of the earlier yr

Customary & Poor’s 500 Index
19 instances.

This might result in a inventory increase within the close to time period, if the corporate hires a brand new CEO quickly. The market desires to see a healthcare professional take over because the retail enterprise faces stiff competitors from e-commerce gamers comparable to

Amazon.com

(Amazon). A robust healthcare providing may revive retail as Walgreens places some new docs’ practices in shops, doubtlessly turning these sufferers into customers.

“They might desire a administration group with a background in healthcare,” says Elizabeth Anderson, an analyst at Evercore. “In the event that they get somebody who has a very good information of the payers and value-based care, that might be considered positively.”

The issue is that Walgreens’ healthcare enterprise, which incorporates VillageMD, Shields Well being Options and CCX Subsequent, must be viable and worthwhile. It can take time. It has misplaced cash this yr due to the funds it has to make when a affected person visits the hospital, Jefferies analyst Brian Tankelot explains. Walgreens should determine the right way to reduce healthcare prices, or the inventory will stay beneath strain and should have to chop its dividend.

The excellent news is that administration stated on its third-quarter earnings name that it expects the healthcare enterprise to method profitability subsequent yr, Evercore’s Anderson says. With these practices considerably growing affected person numbers and income, the unit can obtain profitability by fiscal yr 2025.

However these are long-term considerations. Proper now, the corporate simply wants to rent a CEO that the market can get behind. And if that occurs, Walgreens inventory might be the winner within the quick time period.

write to Jacob Sonenshine at jacob.sonenshine@barrons.com