Wall Street Lunch: Walgreens Drops To Basement Of The Dow

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This is an abridged transcript of the podcast.

Our top story so far in today’s session:

Shares of Walgreens (WBA) fell sharply after the pharmacy chain failed to meet earnings expectations and trimmed its earnings outlook. It cited macro factors and a weaker demand for COVID-19 vaccines and tests.

Rivals CVS Health (CVS) and Rite Aid (RAD) also dropped.

Walgreens lowered its adjusted earnings outlook for full-year 2023 to $4.00–$4.05 per share from $4.45–$4.65 previously, The Street consensus is $4.45 per share.

CEO Rosalind Brewer says the revised guidance takes an “appropriately cautious forward view in light of consumer spending uncertainty.”

The company exceeded consensus with its top line, notching quarterly revenue $35.4 billion, but the bottom line fell short.

Brewer said despite the sales growth, "significantly lower demand for COVID-related services, a more cautious and value-driven consumer, and a recently weaker respiratory season created margin pressures in the quarter."

If today’s drop holds, Walgreens will slump to the basement of the Dow 30 in year-to-date performance. Shares are now down more than 20% for 2023.

Seeking Alpha’s analysts and Quant Rating have a Hold rating on the stock, which is also the consensus of Wall Street.

Now, here’s a look at how trading is shaping up. A host of economic indicators gave traders lots to digest.

Helping bulls was an unexpected rise in May durable goods orders, which bolstered the case for a soft landing. With the market in the good-news-is-good-news camp (at least for today) futures popped after the Commerce Department reported May orders up 1.7% for the month, compared with expectations for a 1% drop.

Core durable goods, ex-transport, rose 0.6% vs. forecasts for no change. Non-defense orders, ex-aircraft rose 0.7% compared to no change expected.

Carson Group strategist Ryan Detrick said another new high in durable goods core shipments ex-aircraft is "a great gauge of business investment," adding that if a recession were "truly coming the next six months (like everyone is saying) we'd expect to see it show up here. (But) it isn't."

The S&P (SP500) and Nasdaq (COMP.IND) are higher. The Dow (DJI) is trailing due to the price drag from Walgreens.

Other indicators were also positive for the economy.

The Conference Board’s June Consumer Confidence Index rose to 109.7, topping the consensus of a rise to 104. The Present Situations and Expectations components both rose.

May New Home Sales jumped 12.2% to an annual rate of 763,000. On a year-over-year basis, new home sales jumped 20%.

And home prices rose more than expected in April, even as mortgage rates remained elevated, according to the Case-Shiller Home Price Index. The April Composite for 20 cities rose 0.9% vs. +0.5% consensus.

The yield curve is flattening a little following days of wider inversion. The 2-year Treasury yield (US2Y) is back below 4.70%.

Among stocks to watch, Delta Air Lines (DAL) is up after releasing information in advance of the company's investor day event. The airline said one of the key investor takeaways is a constructive industry backdrop with structural demand tailwinds and multi-year supply constraints. Delta expects full-year EPS at the top end of the prior range of $5 to $6 per share. For 2024, EPS of more than $7.00 is anticipated vs. $7.12 consensus, with free cash flow more than $4B.

Morgan Stanley calls Philip Morris International (PM) a top pick across the food and tobacco sectors. Analyst Pamela Kaufman pointed to an attractive 4-to-1 risk-reward profile on the stock and the recent pullback has created an attractive entry point. Key reasons to buy PM include the accelerating heated, smokeless tobacco adoption trends.

Bank of America said it is "confident" in Disney’s (DIS) strategic path, amid worries about the box office, its streaming business and a myriad of other issues. Analyst Jessica Reif Ehrlich reiterated her Buy rating and per-share price target of $135, noting that while the company's recent content - specifically mentioning the Pixar movie, Elemental - has "largely underwhelmed" audiences, most of it was produced during the pandemic under previous leadership.

In other news of note, Unity Software (U) unveiled an AI marketplace. The marketplace will allow developers to get access to more AI solutions, including Verified Solutions, along with new technologies.

Wells Fargo started coverage on the video game software company with an Outperform rating and a price target of $48.

And Snowflake (SNOW) announced a partnership with Nvidia (NVDA) to collaborate on building generative AI apps.

The deal will allow Snowflake's customers build AI models using their own data by integrating NVIDIA NeMo – an end-to-end cloud-native enterprise framework -- into Snowflake's data cloud.

Snowflake’s CEO said the partnership will deliver “a new frontier” with “unprecedented insights, predictions and prescriptions to the global world of business."

In the Wall Street Research Corner –

Bernstein downgraded two big tech stocks.

Alibaba (BABA) was downgraded to Market Perform from Outperform. Analysts also cut the price target to $98 from $130.

Analysts expressed concern about the risk of a value trap as quarterly comps get harder from here. Alibaba's problem is not just a lack of user traffic, but merchant crowding driving up search cost, and pressuring merchant ROI, Bernstein said. They noted that Alibaba's stock remains modestly valued, but they weren’t convinced that low multiples and modest EPS accretion can drive shares higher if the competitive problem in core e-commerce persists.

In addition, Bernstein lowered Alphabet (GOOG) (GOOGL) to Market Perform from Outperform, the second downgrade for the stock in as many days.

Analyst Mark Shmulik noted the 40% run-up in shares, but also said he is "optimistic" on digital ad recovery. Still, he said the company has perhaps been "too aggressive" in rolling out generative AI into its core search results, which "could create a near-term air pocket on search ad pricing."