I am getting interested in the perennial also-ran of the pharmacy space, Rite Aid (RAD). A smart friend pointed out that the chart is starting to look really good. Maybe this formerly bankrupt company is now about to make the transition from a shareholder base of speculators to one of larger institutions that have the buying power to bid the stock to a better valuation. The investment thesis is simple: increased traffic from former Walgreen (WAG) and Express Scripts (ESRX) customers, layered on top of more generic sales and a boost from the Wellness+ front end sales promotion.
To a great extent, Rite Aid (like other pharmacies) is benefitting from the rift between Walgreen and Express Scripts. Since Walgreen exited the Express Scripts network two months ago, patients on their network have been migrating to other chains for their prescriptions, boosting pharmacy sales comparisons across the industry. Rite Aid's pharmacy comps are rising steadily, giving a sense that the sales momentum could continue for some time. (In contrast, Walgreen is comping down -9% on pharmacy.)
Rite Aid reported a February comp of 3.1%, with a soft-ish front-end comparison of 1.9% but a very solid 3.7% in the back of house. Analyst consensus was for a 2.1% comparison, so expectations are still favorably low, relative to sales potential. Notably, management said new generics were hurting comps by 242 basis points, so the surge in pharmacy business was actually stronger than implied by the number alone. A weak flu season has also been also a headwind, indicating further underlying strength. Walgreen traffic likely contributed more than 200 bps to the positive comparison.
Keep in mind that, although generics hurt comparable sales due to the lower price point, they are 2x to 3x more profitable than branded drugs. So the cliffs being faced by many big pharmaceutical names is a net positive for Rite Aid and its competitors.
Going forward, Rite-Ai dshould be able to generate about $1 billion in earnings before interest, taxes, depreciation and amortization. That makes the stock reasonably valued at $1.8 billion. Beware of the highly levered balance sheet, however.
Even if you don't buy the fundamental story, technicians would be hard pressed to argue against the chart, which is clearly breaking out after years of consolidation.
Rite Aid represents a risky, but intriguing, long idea showing solid momentum in sales comps, EBITDA and stock price.
