In January, shares of Rite Aid Corporation (NYSE:RAD) stock plummeted from $8.70 to $5.25. But, that wasn’t the bottom for RAD stock.
After jumping back to $6 in February, RAD cratered again in March, dipping to $4.19. It spent the first week of April stabilizing, seemingly motoring its way to $5 when another sudden nosedive took the stock down below $4.
The pattern has continued ever since: big falls followed by brief recoveries followed by dips to even lower lows. That’s been the pattern for RAD stock through the first six months of 2017, which is why the momentum RAD has gathered in the last couple weeks — kiting above $4 after dipping below $3 in mid-June — should be viewed with a heavy dose of skepticism.
Since a big post-election run-up last November and December, no RAD stock rally has lasted longer than three weeks. The stock has plumbed new depths on literally a monthly basis. So, its latest signs of life could be short-lived.
Why has Rite Aid stock been so fickle? For starters, profits have dwindled to almost nothing — the company earned less than a penny per share last year, down from $2.08 in 2015. And, while sales are still improving, the last two quarters marked the slowest top-line growth in two years. Analysts expect things to get worse before they get better, with consensus projections forecasting both sales and earnings to be flat in Rite Aid’s current (2018) fiscal year.
RAD Stock Needs the Walgreens Deal to Get the Green Light
Of course, the company does have one huge potential life line: Walgreens Boots Alliance Inc (NASDAQ:WBA). The larger (and faster-growing) drug store chain has had a $9.7 billion buyout offer on the table for 19 months, though skepticism abounds as to whether the deal will actually get done. The Federal Trade Commission is expected to vote on the merger later this week.
If the deal is approved, it would indeed be a long-awaited coup for Rite Aid, creating a drug-store behemoth with a combined 11,000 locations, about 3,000 more than current industry kingpin CVS Health Corp (NYSE:CVS).
Walgreens’ acquisition offer comes out to as much as $7.00 per share, an 73% premium to RAD’s $4.04 share price as of this writing. The latest push in RAD stock came after a trade publication reported that sources believe the FTC will approve the deal. The fact that the rally only took the stock to $4.05 before quickly retreating tells you that the market is not convinced, burned by a year and a half of false starts.
That said, it’s tempting to take a flyer on RAD stock based on the trade publication’s report. A Walgreens buyout would surely be an instant, and likely more sustainable, boost to Rite Aid’s share price. But you’d be doing so based solely on one report.
Don’t Bet on RAD…Yet
It wouldn’t be because RAD is cheap: the stock still trades at 42 times forward earnings estimates despite falling more than 50% year to date. And, it wouldn’t be because Rite Aid expects sales and earnings to improve even if the Walgreens deal doesn’t get done.
Really, the fate of RAD stock, at least in the short term, is almost entirely dependent on the Walgreens merger gaining approval.
But, what if it doesn’t? Clearly, the market isn’t sold. If Wall Street’s skepticism is validated, then RAD could sink to even greater depths in a matter of days.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
