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Should You Buy Rite Aid Corporation (RAD) Stock? 3 Pros, 3 Cons

Rite Aid's stock has been pounded again as more merger doubts emerge

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The situation at the Rite Aid Corporation (NYSE:RAD) keeps on getting worse. What seemed like a simple merger deal with Walgreens Boots Alliance Inc (NASDAQ:WBA) has turned into a soap opera. RAD stock makes sizable moves up and down with regularity as each new merger rumor causes traders to eagerly swing into action.

However, on net, the majority of traders have been selling RAD stock. It hits increasingly low levels with each passing week. Wednesday’s latest development now has RAD stock plunging below the $4 mark; that’s a new 52-week low.

In fact, it’s a more than three-year low for Rite Aid. Can Walgreens Boots Alliance still pull this deal off and salvage the situation for Rite Aid stockholders? Or will RAD stock continue trending toward zero?

RAD Stock Cons

The Unending Merger Process: Walgreens originally agreed to acquire Rite Aid at the end of 2015. My how time has passed … yet the deal hasn’t closed. Far from it, in fact, Walgreens cut its offer for RAD stock from the initial $9. The updated offer would give shareholders $6.50-$7 per share of RAD stock, depending on how many stores Rite Aid divests to comply with antitrust concerns.

At first, Rite Aid shareholders reacted bitterly to the slashed merger premium. RAD stock had consistently traded above $6.50 in recent quarters, thus the new offer would leave many holders with a loss on their positions. However, as time goes on, that $6.50-$7 offer itself looks increasingly dubious. RAD stock initially settled in the mid-$5’s following the revised deal terms. That suggested a reasonably high probability of the deal closing. However, in recent weeks, shares have tanked again, as the market reflects increasingly uncertainty that shareholders will even get that $6.50 payout.

FTC Lawsuit Coming? The Capitol Forum, a private subscription research shop, suggested Wednesday that the Federal Trade Commission will bring a lawsuit to stop the Walgreens/Rite Aid merger. While Rite Aid is clearly struggling, federal regulators still view the combined entity as potentially too large. Even after divesting 1,000 or more stores to Fred’s, Inc. (NASDAQ:FRED), the combined company would still exert a great deal of market dominance within the American pharmacy sector.

Walgreens has pushed aggressively on the timeline to try to get this deal done. However, that speediness may simply have irritated the FTC and hardened its resolve. Bulls had speculated that the new Donald Trump administration would be more favorable for mergers, though it simply may not play out in this case.

In Trouble If Merger Fails: It’s easy to make a bull case for RAD stock if the merger fails. The stock traded up around $7-$8 prior to the start of the merger talks. Remove the uncertainty and Rite Aid stock recovers sooner or later, right?

Not so fast. Rite Aid’s financial results have deteriorated materially over the past five quarters. Walgreens came in with its bid as Rite Aid’s same-store sales growth rate touched multiyear highs up around 5% year-over-year. However, Rite Aid has struggled; that growth was an aberration, not a new trend. Same-store sales turned negative late last year, and are now several percent into the red. EBITDA is down by more than 10% over the past few quarters as well. For a heavily levered business, even moderate slowdowns really hit the equity hard. Rite Aid today is much weaker than it was when Walgreens made its initial buyout offer.

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Article printed from InvestorPlace Media, http://investorplace.com/2017/04/should-buy-rite-aid-corporation-rad-stock-pros-cons/.

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