When will shares of U.S. drugstore chain Rite Aid Corporation (NYSE:RAD) find a bottom? RAD stock has been crushed this year, falling almost 50%, compared with a 5.4% rise in the S&P 500 index. But patient shareholders can make an easy 20% by buying now. And that’s being conservative.
The reason for punishment? Investors have grown concerned that its $17.2 billion proposed merger with larger rival Walgreens Boots Alliance Inc (NASDAQ:WBA) — announced in October 2015 — won’t close.
RAD stock closed at $4.21 Tuesday, netting yet another 52-week low at $4.15, compared to its 52-week high of $8.77. Notably, Tuesday’s trading volume of RAD stock of 26 million, or 67% above its normal average, suggests investors are selling with conviction. This was despite the fact there was no specific news about the company.
Don’t Give Up on RAD Stock
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, Rite Aid stock now trades 35% below the lowest price WBA said it would pay. I still see this as a buying opportunity for RAD stock.
The continuous drag of the Walgreens deal has heightened investors’ frustration. Despite WBA’s efforts to appease federal regulators by divesting assets, there’s no clear sign of when or if regulators will green-light the deal. Until then, it seems RAD stock might remain handcuffed to either scenario. From my vantage point, it doesn’t matter what regulators decide — they just need to make a decision, allowing RAD stock to then trade on its own merits.
The company is set to report fourth quarter fiscal 2016 earnings results later this month. Wall Street expects Rite Aid to deliver a 2-cent per share loss on revenue of $8.27 billion. This compares to the year-ago quarter when the company earned 6 cents per share on revenue of $8.27 billion. For the full year, earnings are projected to be 5 cents per share, down from 16 cents a year ago, while revenue of $32.58 billion would rise 6% year-over-year.
In the third quarter, Rite Aid reported a net income of $15 million on $8.1 billion in revenue. Meanwhile, adjusted net income of $23.3 million, or 2 cents per share, underscored the solid cost controls and improved front-end business the management continues to make, despite the tough operating environment the Walgreens merger delay has created.
Bottom Line for Rite Aid Stock
In terms of the WBA deal, RAD stock can certainly use a healthy dose of good news. But I’m not holding my breath. Nevertheless, I see an opportunity here for investors to make some strong gains.
RAD stock currently trades on the assumption that the company will cease to exist if the Walgreens deal is nixed. And that’s just not the case. From current levels, an easy 20% can be made if Rite Aid stock just recovers to $5 per share.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
