One way or another, Rite Aid Corporation (NYSE:RAD) is apt to serve up some fireworks on Wednesday morning. That’s when we’ll hear last quarter’s results from the drug store chain.
RAD stock has been riding high since October of last year, gaining 86% between then and now, fueled by compelling growth prospects. But, one can’t help but wonder if the meteoric rise has set up a “buy the rumor, sell the news” situation regardless of how strong the Rite Aid earnings reports ends up being.
What’s a current or prospective owner of RAD stock to do, knowing this stock — perhaps more so than any other of its ilk –– is as much a trading instrument as it is an investment in the organization? First and foremost, keep reading.
Rite Aid Earnings Outlook
If the pros are right, Rite Aid will post earnings of 7 cents per share of RAD stock on $6.8 billion in sales when the company reports its fiscal Q4 numbers before the opening bell rings on Wednesday. That would be an improvement on the bottom line of 6 cents per share RAD stock the company earned in the same quarter a year earlier, with top line growth of 2.9% on a year-over-year basis.
The expected fourth-quarter numbers downplay how well Rite Aid has actually done in fiscal 2015. If the company simply reports as expected, Rite Aid will have generated net earnings of 35 cents per share of RAD stock for its prior fiscal year, well up from the 23 cents it earned in fiscal 2014. Sales of $26.5 billion would be 3.7% stronger than the year-ago top line.
And just for the record, Rite Aid has topped earnings estimates in each of its past four quarters, and hasn’t missed estimates since the last quarter of fiscal 2012 (when it was in an entirely different situation).
What Rite Aid Investors Need to Think About
While numbers tell part of the story, they won’t tell the whole story when the Rite Aid earnings numbers are posted on Wednesday morning. Other aspects of the company could be — and should be — on investors’ minds, with two of them being prevalent.
One of them is an enormous debt load stemming from the acquisition of smaller rival and pharmacy benefits manager EnvisionRx. All told, Rite Aid took on $1.8 billion worth of new debt to finance the purchase of EnvisionRx.
The move is a smart one that Rite Aid has to make, or otherwise risk getting squeezed out by bigger competitors in an environment fostering new relationships between pharmacies and other benefits managers like EnvisionRx. As too many long-term owners of RAD stock know, however, debt nearly did the company in just a few years ago.
The second item that mark a defining turn for Rite Aid is its recent entry into the clinical space, via the acquisition of RediClinic.
RediClinics are a small, healthcare clinics found in a few dozen grocery stores, mostly in Texas. Rite Aid acquired the company early last year, and has already opened a handful more, finding measurable success with them. Although it’s still only a small part of the company’s revenue-bearing asset base, it’s a model that could be expanded dramatically in the foreseeable future.
Getting a Grip on RAD Stock
Click to Enlarge With all of that being said, the company’s fundamentals only matter some of the time. Much of the rime, RAD shares are the guinea pigs in a psychological chess match. A technical look may be as meaningful as a preview of Rite Aid earnings expectations. To that end …
There’s no denying the wind is currently at the back of those traders who have already bought RAD stock, especially now that the ceiling near $8.55 has been broken. But, there’s also no denying shares are technically overbought and are potentially ripe for a pullback.
The bulls will be quick to (rightfully) point out that RAD has made bigger and more prolonged rallies in the past. For instance, shares soared in 2013 and in the first half of 2014, and were arguably overbought most of that time.
That was, however, truly different. RAD stock soared then because Rite Aid was a turnaround story. Now RAD is priced at a frothy trailing price-to-earnings ratio 26.5 and an equally-frothy forward-looking P/E of 20.8, with not much of the turnaround story left to tell.
Bottom Line for RAD
Never say never, but it looks like much of the future success of Rite Aid has already been priced into RAD stock, and then some. The upcoming Rite Aid earnings report looks like it could serve as a profit-taking catalyst, particularly if the market decides the company’s debt burden just doesn’t make sense relative to the rest of its trailing or projected numbers.
On the flipside, any healthy dip from RAD would be a buying opportunity. Note there’s natural support for RAD stock at the 100-day line (gray) currently at $7.48. That would be a great entry point or re-entry point into the stock, as the forward-looking P/E would be a palatable (though still not “cheap”) 17.4 at that price.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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