• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Healthcare

Rite Aid Is Starting to Look Healthy

This is a risky long idea, but an intriguing one as well.
By GARY DVORCHAK
Mar 16, 2012 | 08:22 AM EDT
Stocks quotes in this article: RAD, WAG, ESRX

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 (RAD) -- Pharmacy Sales Comparisons
Source: Credit Suisse
View Chart » View in New Window »

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 (RAD) -- Daily
Source: Yahoo! Finance
View Chart » View in New Window »

Rite Aid represents a risky, but intriguing, long idea showing solid momentum in sales comps, EBITDA and stock price.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Dvorchak had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Healthcare

More from Healthcare

Dividend Hunters Will Like the Combination Found in Global Medical REIT Shares

Chris Versace
Mar 7, 2021 9:00 AM EST

More people seeking more healthcare and medical attention will create a rising tide for GMRE's addressable market.

Walgreens Boots Alliance Is Likely to Weaken Further

Bruce Kamich
Mar 5, 2021 12:44 PM EST

Let's check out the charts and indicators.

Emergent BioSolutions Turns Bearish, So Beware

Bruce Kamich
Mar 4, 2021 8:27 AM EST

A break in a key support level could precipitate further declines in the life sciences company's shares.

Centene Charts Remain Weak and Vulnerable

Bruce Kamich
Mar 3, 2021 1:35 PM EST

Let's review the charts and indicators.

Stopped Out on Johnson & Johnson but Willing to Buy it Lower

Bruce Kamich
Mar 3, 2021 12:20 PM EST

Stand aside for now.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:38 AM EST GARY BERMAN

    The INDU and DIA

    FIBOCALL: The INDU index and the DIA The INDU ...
  • 10:44 AM EST JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    "The Challenge of Short-Selling"
  • 08:40 AM EST PAUL PRICE

    Recent Pick SpartanNash (SPTN) Raised Its Quarterly Payout by 3.9%

  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2021 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login