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Dow Jones Drops 300 Points as Walgreens' Profits Plunge, Microsoft and Cisco Stocks Upgraded

By Timothy Green – Updated Jul 9, 2020 at 5:06PM

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Walgreens is raising its cost savings target as the pandemic hits sales and profits, and analysts see Microsoft and Cisco as good bets.

Daily deaths attributed to COVID-19 are rising to record levels in some U.S. hotspots, including Florida, Texas, and California. The prospect of a quick economic recovery in the U.S. appears to be fading as the pandemic shows no signs of slowing down. The Dow Jones Industrial Average (^DJI -1.71%) was down 1.4% at 2 p.m. EDT as investors grappled with how to value stocks in an unprecedented environment.

Walgreens Boots Alliance (WBA -0.47%) reported its quarterly results in the morning, and investors did not like what they saw. Earnings plunged due to the pandemic, and the company suspended its share buyback program and announced significant layoffs. Meanwhile, shares of Microsoft (MSFT -1.94%) and Cisco (CSCO -1.41%) held their ground after analysts upgraded the stocks.

A Walgreens store.

Image source: Walgreens.

Walgreens reports weak earnings and announces layoffs

Drug store chain Walgreens estimates that the COVID-19 pandemic reduced its sales in the fiscal third quarter by between $700 million and $750 million. Gross margin was negatively impacted by a shift to lower-margin categories, and operating costs rose due to social distancing and cleaning expenses.

Total revenue of $34.6 billion was up 0.1%, ahead of analyst expectations by $310 million. The U.K. business was hit particularly hard, prompting the company to book a non-cash impairment charge of $2 billion. Customer traffic at Walgreens' Boots stores in the U.K. was down 85% in April, and the company saw a global decline in pharmacy volume due to a slump in doctor visits and hospital patient admissions.

The impairment charge led Walgreens to report a net loss of $1.7 billion. Non-GAAP (adjusted) earnings came in at $723 million, or $0.83 per share. The per-share number was down 44% year over year and $0.39 below the average analyst estimate.

With Walgreens' profits in free fall, the company now plans to cut annual costs by $2 billion by fiscal 2022, up from a previous target of $1.8 billion. In the U.K., Walgreens will close some stores and reduce its headcount by around 4,000 positions.

Investors did get some good news on Thursday: Walgreens raised its quarterly dividend by 2.2% to $0.4675 per share. However, the company also suspended its share repurchase program. Walgreens stock was down 8.4% in the afternoon.

Microsoft and Cisco upgraded

While Walgreens stock tumbled on Thursday, shares of tech giants Microsoft and Cisco managed to push higher due to some positive analyst commentary.

Wedbush raised its price target on Microsoft stock from $220 to $260 and maintained its "outperform" rating. The cloud business was behind the price target bump, with Wedbush pointing to increased remote working due to the pandemic as a key growth driver for Microsoft. Microsoft's Azure cloud platform is No. 2 in cloud infrastructure behind Amazon Web Services, and its Office 365 and Teams subscription software products are racking up subscribers.

Cisco, the leading provider of enterprise networking hardware, also got some analyst love on Thursday. Morgan Stanley upgraded Cisco stock from "equal weight" to "overweight," citing a valuation that's lower than that of the S&P 500. Morgan Stanley sees risks for Cisco due to economic uncertainty, but an increase in demand for networking and cybersecurity amid the pandemic should act as a tailwind for the company. Morgan Stanley boosted its price target on Cisco stock from $46 to $54.

Microsoft stock was up 0.2% by Thursday afternoon, while Cisco stock had surged 3%.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Timothy Green owns shares of Cisco Systems. The Motley Fool owns shares of and recommends Amazon and Microsoft and recommends the following options: long January 2022 $1920 calls on Amazon, short January 2021 $115 calls on Microsoft, long January 2021 $85 calls on Microsoft, and short January 2022 $1940 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Microsoft Corporation Stock Quote
Microsoft Corporation
$232.90 (-1.94%) $-4.60
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
$40.00 (-1.41%) $0.57
Walgreens Boots Alliance, Inc. Stock Quote
Walgreens Boots Alliance, Inc.
$31.40 (-0.47%) $0.15
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$28,725.51 (-1.71%) $-500.10

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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