Rite Aid Corporation: RAD Stock Is Offering Investors 15% Upside This Year

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Shares of Rite Aid Corporation (RAD) stock have experienced uncharacteristic weakness, which is surprising because the Walgreens Boots Alliance Inc (WBA) acquisition is a catalyst that should act as support for Rite Aid stock. However, investors needn’t worry.

Rite Aid Corporation: RAD Stock Is Offering Investors 15% Upside This YearGiven that RAD is not acting as if there is an acquisition pending, investors can take advantage and find themselves upside of about 15% in a relatively short period of time.

A Quick 15% Return for Rite Aid Stock?

The WBA, RAD merger is expected to finalize sometime in the second half of this year. With July right around the corner, that could mean two months, three months and at worst, six months until the buyout price is awarded to existing shareholders.

Walgreens offered RAD stock owners $9 per share — an offer that has already been approved by shareholders. With Rite Aid stock currently trading around $7.65, the $9 buyout price represents upside of slightly more than 17%, which is a good return when you consider that it’s right around the corner.

Therefore, RAD would seem like a slam-dunk and obvious buy at its current price. So why has it fallen over the last couple of months?

The single overhang is a decision by the Federal Trade Commission to determine whether the merger violates any antitrust laws. Investors are somewhat concerned after the FTC requested more information about the merger earlier this year, a request that Walgreens called “expected”.

Nevertheless, the FTC’s response has not been identified as a big risk by Wall Street analysts or either company. There are two reasons:

First, Walgreens has already agreed to divest up to 1,000 of Rite Aid’s 4,600 stores in 31 states. WBA insists that it will unlikely have to divest more than 500 stores to meet the demands of regulators. Hence, WBA has allowed itself a substantial amount of wiggle room.

Second, it would difficult for the FTC to reject this merger despite recently allowing CVS Health Corp‘s (CVS) acquisition of 1,600 Target Corporation (TGT) pharmacies.

Yes, CVS and Walgreens would be a duopoly in metropolitan areas, but WBA has already pledged to stay removed from rural areas and the specialty pharma space — two areas that are dominated by independent and smaller pharmacies.

Therefore, the risks associated with the Walgreens and Rite Aid merger are very minor, if not nonexistent given what WBA is willing to divest in order to appease regulators, and the history of past FTC decisions in this industry related to mergers and acquisitions.

Bottom Line for RAD Stock

Now, if WBA’s offer for RAD stock came with the stipulation that it wanted to keep all stores, and any requests to close stores would be a deal breaker, then investors would need to worry. However, that’s not the case.

Walgreens realizes that even if it must divest 1,000 stores, and thereby eliminate $4 billion in annual revenue, it will still gain a near $30 billion business at a multiple of just 0.30 times forward sales. That’s about half the price that investors pay per dollar of Walgreens revenue (price/sales). And not to mention, Walgreens still gets to keep and enter the pharmacy benefit management space, a luxury that many believe is driving its interest in Rite Aid.

So when the dust finally settles, and 2016 ends, Walgreens will have purchased RAD stock at a 15% plus premium to today’s current price. That’s a nice return, regardless of who you are or what your goals are.

As of this writing, Brian Nichols does not own shares of Rite Aid, but may initiate a long position in the next 72 hours.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/05/rite-aid-stock-rad-15-upside/.

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