Patience is still the right approach when deciding what to do with Rite Aid Corporation (NYSE:RAD) and RAD stock.
Shares of the drug chain giant have been crushed this year, falling some 50%, compared with an almost 7% rise in the S&P 500 index. But there are subtle signs that Rite Aid stock could have bottomed.
More importantly, a decision regarding its $17.2 billion proposed merger with larger rival Walgreens Boots Alliance Inc (NASDAQ:WBA) could now be imminent.
Reasons to Like RAD Stock
On Tuesday, both Rite Aid and Walgreens said they have met requests by the Federal Trade Commission for information about their planned merger. The companies are essentially disclosing that the ball is now in the hands of federal regulators who have straddled the fence for almost a year. Understandably, the FTC struggles to green-light a marriage that would combine the second and third largest drugstore chains, which would create a more formidable rival to CVS Health Corp (NYSE:CVS).
Despite meeting several regulatory demands, including divesting assets to Fred’s, Inc. (NASDAQ:FRED), Rite Aid and Walgreens continues to encounter roadblocks from their deal that was first announced in October 2015.
As it stands, the recent announcement by both companies now means that the FTC has 60 days to either approve or deny the merger. Fairly or unfairly, this means RAD stock — until then — may remain handcuffed to the FTC’s decision.
The continuous drag of the deal has heightened investors’ frustration. Despite Walgreens’ efforts to appease federal regulators by divesting assets, there has been no clear sign of when or if regulators will approve the deal. From my vantage point, however, Rite Aid stock is still a buy at this level, especially given that the shares — now trading at 52-week lows — trade well below Walgreens’ agree-upon buy price range of $6 to $7 per share.
This compares to the $9-per share offer price Walgreens once had on the table. Not to mention, Rite Aid is coming off strong fourth-quarter earnings results and deserves to trade on its own merits. Rite Aid’s fourth-quarter fiscal 2016 earnings results, which included a top- and bottom-line beat, show that the embattled drug store chain is performing much better than RAD stock has.
Fourth-quarter revenue rose almost 3% year-over-year to $8.5 billion. And the company reported breakeven adjusted earnings, which beat Wall Street estimates for a 2-cent loss. With the company now, at least, sixty days closer to knowing its future, Rite Aid stock looks like a bargain from a risk-versus-reward perspective.
Bottom Line for RAD Stock
Rite Aid stock can certainly use a healthy dose of good news, but I’m not holding my breath.
Still, 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 25% can be made if RAD stock just recovers to $5 per share.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
