Rite Aid (RAD), the third-largest drugstore chain in the U.S., reported a solid fiscal third quarter on Thursday, showing the company remains in good health as it moves forward with its agreement to be bought out by rival Walgreen Boots Alliance (WBA).
With both earnings and revenue coming in around where analysts expected, RAD stock was trading sideways as of the late morning, mirroring the ho-hum returns of the S&P 500. For the year, the S&P is flat while Rite Aid shares are up nearly 5%.
Let’s take a look at the company WBA agreed to acquire for $9.4 billion, or $9 per share, earlier this year.
Rite Aid: Earnings Crater, Revenue Soars
For the three months ended Nov. 28, Rite Aid earnings per share clocked in at six cents. Those fiscal third-quarter profits were 40% below the 10 cents a share RAD stock earned in Q3 2014, with the decline largely driven by expenses related to its $2 billion acquisition of pharmacy benefits manager EnvisionRX earlier this year.
The EPS of six cents is precisely what analysts expected.
While profits languished, revenue shot higher, jumping from $6.7 billion a year ago to $8.15 billion in the most recent quarter. Don’t go rushing to buy RAD stock on account of just that, though — that 22% revenue growth was driven entirely by the additional revenue from EnvisionRX, which Rite Aid didn’t own a year ago.
Analysts expected that to happen, too: The consensus estimate was for revenue of $8.18 billion.
It’s not surprising that RAD stock isn’t going bonkers on Q3 results. Not only were they exceptionally average, the company is set to be absorbed by WBA for the fixed price of $9 a share. There won’t be significant changes in the stock price — which currently sits just below $8 per share — until investors get a better feeling for how likely the deal is to actually be cleared by regulators.
Bottom Line for RAD Stock
Right now, RAD stock trades at about a 12% discount to what WBA agreed to pay for it. The deal is expected to close in the second half of 2016, so a healthy chunk of that discount is simply due to the time value of money. But the rest of it is deal risk, which is a legitimate concern in the hyper-consolidated drugstore industry. If the RAD-WBA merger goes through, Walgreens and CVS (CVS) will be the only two relevant players in the U.S. market.
Truth be told, keeping tabs on what the Federal Trade Commission thinks about that deal is far more important for current shareholders than keeping tabs on Rite Aid’s quarterly earnings. Heck, even Rite Aid is laser-focused on the deal: It declined to update guidance for fiscal 2016 or issue guidance for fiscal 2017.
Unless the FTC abruptly decides to start publicly slamming the acquisition by Walgreens, RAD stock should basically tread water for the coming months, until a verdict is reached on the deal.
Contain your excitement.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
