Rite Aid Corporation (RAD) Stock Is a Gamble With a Big Payout

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Shares of U.S. drugstore chain Rite Aid Corporation (NYSE:RAD) are off more than 45% year-to-date, plumbing 52-week lows as its $17.2 billion merger with larger rival Walgreens Boots Alliance Inc (NASDAQ:WBA) — announced in October of 2015 — continues to drag. It’s gotten to the point where RAD stock can lose chunks on no news whatsoever.

Thus, while Walgreens continues to divest assets to appease federal regulators, who worry about it becoming too big, the longer the proposed merger drags on, investors — who have seen Rite Aid stock erode 50% in three months — stand to suffer more losses.

All told, RAD stock can use a healthy dose of good news. But will it come?

If it does, the stock certainly boasts appeal from a valuation perspective. In fact, shares look like a screaming bargain. Rite Aid appears to be trading on the assumption that the company is about to go out of business. Recall that in February, Walgreens — which once offered $9 per share for RAD stock — revised its buyout agreement, saying it would pay “a maximum of $7.00 per share and a minimum of $6.50 per share.”

Based on Tuesday’s closing price, RAD stock now trades 30% below the lowest price Walgreens said it would pay.

Obviously, the dynamics have changed. But Walgreens — which last year agreed to sell 865 Rite Aid stores to Fred’s, Inc. (NASDAQ:FRED) for $950 million — still sees value in the deal, or it wouldn’t still be in pursuit. According to a recent Bloomberg report, Walgreens is working on a new deal it believes the Feds will like.

Although Bloomberg reported no specifics of the new terms, it is rumored that Walgreens’ new deal could now involve divesting distribution centers and certain strategic software. This news comes on the heels of the New York Post reporting that Walgreens was pushing for a speedier review and had “given regulators substantially all the information they need to make a decision.”

Baird analysts don’t seem optimistic about the situation overall, but they do at least seem optimistic about the idea that a merger will happen. In a recent analyst note, Baird said it assumed the deal would close on Aug. 1 … at a reduced price, with lower core Rite Aid estimates, though.

Bottom Line for RAD Stock

As all of these new developments unfold, what is clear is that Walgreens desperately wants Rite Aid. And this makes RAD — despite its punishment — tough to ignore. Indeed, the volatility has been a great source of concern.

But on the flip side, that same volatility could send RAD stock in the opposite direction, especially given the fact that Rite Aid’s fundamentals are still intact.

This is a gamble, but it could be a lucrative one.

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


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/rite-aid-corporation-rad-stock-gamble-big-payout/.

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