Rite Aid Corporation: Pending Buyout Could Prevent Big Move After RAD Earnings

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Drug store chain Rite Aid Corporation (RAD) is due to report earnings Thursday morning before market open.

Rite Aid Corporation: Pending Buyout Could Prevent Big Move After RAD EarningsUnlike tech heavyweights like Amazon (AMZN), Alphabet (GOOG, GOOGL) and Tesla (TSLA), drugstores don’t tend to have entirely unpredictable earnings, so the results should be roughly in line with analyst estimates.

That doesn’t mean RAD stock won’t move though — forward guidance and the content of management’s conference call will also affect Rite Aid’s stock price, and could even do so dramatically.

Here’s what RAD stock holders should look for when the company reports results for the three months ended Nov. 30:

Consensus Figures, Envision Rx, Walgreen Discussion

Analysts expect RAD stock to earn six cents per share, 40% less than the 10 cents per share it earned in the year-ago quarter. The “earnings whisper,” or what the Street supposedly unofficially expects from the bottom line, is seven cents.

Revenue, however, is expected to jump 22.2% to $8.18 billion.

Taking a look at the last few quarters, RAD hasn’t exactly been blowing anyone away with its earnings. In each of the first two quarters of fiscal 2016, Rite Aid has missed EPS estimates.

The main reason EPS has been falling and revenue has been growing significantly is the February purchase of pharmacy benefits manager Envision Rx for $2 billion. Envision Rx is projected to post revenue of $5 billion in 2015, but has an operating margin of just 1.6%, roughly half of Rite Aid’s.

The elephant in the room, of course, is the fact that RAD has a buyout offer from Walgreen Boots Alliance Inc (WBA) for $9 per share, a premium of 16% from Monday’s closing price at $7.76.

As long as that offer remains on the table, there’s somewhat of an artificial floor — and ceiling — on the RAD stock price. Rite Aid stock won’t plunge if it suffers a weak quarter, and it won’t shoot past $9 if it sets new sales records.

The Danger for Rite Aid Stock

The reason the proposed acquisition by Walgreen Boots Alliance hasn’t already made RAD stock trade around $9 a share is deal risk.

There’s a chance that the Federal Trade Commission will reject the deal on antitrust grounds. As it currently stands, there are very few players in the drugstore space already, with CVS (CVS) and WBA taking the top two spots, then Rite Aid taking a very distant third. Creating an even more firmly entrenched duopoly may not be in the best interest of consumers.

Considering the recent actions of regulators, it’s very possible a WBA/RAD deal never happens. The FTC just sued to block the Staples (SPLS) – Office Depot (ODP) deal, one I expected the FTC wouldn’t approve of when the proposed merger was initially announced.

The way I see it, the Walgreen-Rite Aid deal would be more egregious from an antitrust point of view than SPLS-ODP, so even though the deal’s supposed to close in the second half of calendar 2016, I don’t see it happening.

All the more reason to hope for good numbers from RAD on Thursday morning.

As of this writing, John Divine was long AMZN. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/12/rite-aid-corporation-pending-buyout-could-prevent-big-move-after-rad-earnings/.

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