Rite Aid Profit and Shares Soar, But RAD Stock a Hold at Best

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Rite Aid Corporation (RAD) gave the market an early Christmas present in the form of a beat-and-raise quarter Thursday, and now RAD stock is going bonkers for a second straight session — but then crazy volatility is something anyone holding Rite Aid stock is used to by now.

RAD stockFor all its ups and downs — and they have indeed been epic this year — Rite Aid stock was still up 20% for the year-to-date before the latest earnings-fueled rally.

But what a ride it’s been. RAD stock started the year just over $5. Since then it’s traded as high as nearly $9 and as low of nearly $4.40. On a percent basis, Rite Aid stock peaked with a year-to-date gain of 68% back in June — and was down as much as 11% just two months ago.

Such is life as the nation’s No. 3 drugstore chain by market cap and revenue, especially when you’re a distant No. 3 at that. It’s hard enough for Rite Aid (and RAD stock) to compete with traditional drugstore operators like CVS Health Corp (CVS) and Walgreen Company (WAG), but Wal-Mart Stores Inc. (WMT) has a huge drugstore/pharmacy business too.

Revenue at Rite Aid has been stagnant for years, stuck between $24 billion and $26 billion going all the way back to fiscal 2008.

RAD Stock Jumps on Earnings

But maybe better times are finally on the horizon for Rite Aid and RAD stock. Rite Aid is enjoying accelerating revenue and margin growth, and is set to post a third straight year of profitability after five consecutive annual net losses. It even lifted its profit outlook for the current year.

For the third quarter ended Nov. 29, Rite Aid earnings rose to $104.8 million, or 10 cents a share, from $71.5 million, or 4 cents a share, a year earlier. Analysts, on average, forecast Rite Aid earnings to come in at 5 cents a share, according to a survey by Thomson Reuters.

Revenue, likewise, beat Wall Street estimates, rising 5.3% to $6.7 billion versus a forecast of $6.6 billion. Same-store sales — a critical measure of a retailer’s health — rose 5.4%, exceeding estimates of 5.1%.

The better-than-expected quarterly results allowed Rite Aid to lift its full-year outlook. Rite Aid now sees earnings coming in at 31 cents to 37 cents a share. Analysts — who will now surely lift their own projections — were looking for full-year earnings of 31 cents a share.

Rite Aid attributed its strong showing to a greater emphasis on health and wellness products — a current trend in the drugstore industry. The pharmacy business was also brisk. Pharmacy same-store sales rose 7.2%, driven by growth in the number of prescriptions filled.

As with any drugstore chain, the pharmacy business is key. Sales of prescriptions accounted for 70% of total drugstore sales.

Bottom Line

As promising as the quarter and recent trends have been at Rite Aid, RAD stock probably isn’t worth the trouble. As noted, it’s volatile and risky. (With a beta of close to 2, a down market sends Rite Aid stock reeling.) It’s also hard to believe Wall Street’s long-term growth forecast of 40% a year. That’s higher than Facebook Inc (FB), for crying out loud.

If you hold Rite Aid stock, by all means, keeping holding on. But new money need not apply.

 As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/12/rite-aid-corporation-rad-stock/.

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