Big pharma isn’t the only one struggling from the loss of patent protection on blockbuster drugs. Rite Aid (RAD) stock tumbled Thursday after the drugstore chain clobbered quarterly earnings estimates but cut its profit outlook because of higher sales of lower-margin generic drugs.
The latest news is a blow for RAD stock, which has had an amazing 52-week run after years of struggling — and failing — to break above 2 bucks share. Over the last year, Rite Aid stock is up 73%. Heck, in the last two years, RAD stock is up nearly 400% thanks to a successful turnaround program.
No, Thursday’s double-digit percent selloff won’t ruin a good year for Rite Aid stock — it was up 30% YTD before the shellacking — but it will likely fuel a reversal of trend that has plagued RAD stock since June.
Sorry to say, but the bull market seems to be over for Rite Aid stock. Investors betting on a successful turnaround were handsomely rewarded for being right — but they started taking profits on that trade months ago.
That’s a shame, given how strong RAD’s quarterly earnings were, and that the latest troubles aren’t really the company’s fault.
Rite Aid Stock Clipped by Forecast
For the most recent quarter, RAD said earnings nearly quadrupled to $127.8 million, or 13 cents per share, up from $32.8 million, or three cents per share, a year earlier. (Rite Aid also benefited from some easy comparisons, seeing as how last year’s quarter included a loss of $62.2 million on debt retirements.)
Regardless, the company still beat Wall Street estimates by a wide margin. Analysts on average were looking for earnings of 6 cents per share, according to a survey by Thomson Reuters. Revenue likewise eclipsed Street estimates. The top line rose nearly 4% to $6.52 billion. Analysts projected revenue to hit $6.48 billion.
The revenue and profit growth was driven by the pharmacy segment, but now that same business is set to cool off in the second half, leading to Rite Aid’s guidance cut.
For the most recent quarter, pharmacy same-store sales rose 5.6%, RAD said, while prescription sales accounted for 69% of total drugstore sales. But like big pharma, Rite Aid is hurting from the loss of exclusivity on blockbuster drugs. The margins on big-time brand-name drugs like Lipitor or Viagra are much higher than the margins on their generic substitutes.
Unfortunately for anyone holding Rite Aid stock, as we’ve written before about Pfizer (PFE), Merck (MRK) and the rest of the industry, there’s no quick fix to the loss-of-exclusivity problem.
As a result, RAD now expects full-year earnings to come in at 22 cents to 33 cents a share, down from prior guidance of 30 cents to 40 cents. The Street, meanwhile, was projecting full-year EPS at 34 cents. The company trimmed its revenue outlook, too.
Bottom Line
Rite Aid stock is not a buy on the dip. At least not yet. The latest price action might have adequately discounted the deteriorating margin situation, but now the technicals are terrible. Rite Aid stock’s 50-day moving average is crossing its 200-day moving average on the way down after a long period of weakness. That’s a sell signal.
Whether you believe in technical analysis or not, plenty of the rest of the market does, which often makes it a self-fulfilling prophecy. Between the weakening fundamentals and the sell signal, it’s time to book profits on Rite Aid stock.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
