RAD Stock Investors Should Be Thanking Walgreens Right Now

It has been a long time since Rite Aid (RAD) reported a month where year-over-year revenue declined. Over the last few months, Rite Aid’s sales growth has decelerated, but for November, sales actually turned negative.

RAD Stock Investors Should Be Thanking Walgreens Right NowThankfully, Walgreens’ (WBA) acquisition kept RAD stock from falling lower after the report, and RAD stock is still a buy despite the questions that falling revenue brings.

Growth Is Getting Harder to Come By

Rite Aid’s same-store sales for the 39 weeks ended Nov. 28, 2015 have now increased 1.9%. While decent, the performance is nowhere near what Rite Aid stock owners saw last year, or even earlier in 2015.

For the 43 weeks ended Dec. 27, 2014, RAD’s same store sales jumped 4.3% behind a 5.9% increase in pharmacy sales. This performance carried into the first half of 2015, when Rite Aid consistently grew same-store sales by 3% to 4%, and sometimes more. But here lately, RAD has hit a wall of sorts.

In September its comp sales increased just 1.5%, and then just 1% in October. Still, despite this deceleration Rite Aid has managed to keep overall sales going higher.

All that changed in November when sales fell 0.6%.

What’s interesting is that RAD stock did not react negatively to this report. Back in early October, after Rite Aid announced September monthly sales data, where overall sales grew just 1.8%, Rite Aid stock fell in response, about 3%.

The reason RAD did not fall after November data is because of the security that Walgreens’ acquisition creates. The fact that RAD stock held stable despite its November performance further illustrates why Rite Aid is a great merger arbitrage opportunity right now.

RAD Stock Is a Safe 15% Gain

Rite Aid’s monthly and quarterly operating performance from this point forward doesn’t really matter all that much to shareholders because of Walgreens’s $9 per share acquisition. With Rite Aid stock trading around just $7.90, there is still upside of nearly 14% for investors who own RAD stock until the merger closes in the second quarter of next year.

That said, it is somewhat unusual for a stock to be trading so far off its implied buyout price just months from the closing. That’s because there is still some concern that regulators will block the deal. However, that is very unlikely.

Even after buying Rite Aid, Walgreens won’t have an overwhelming market share relative to CVS. Furthermore, there are countless large retail pharmacies like Kroger (KR) and Walmart (WMT) with thousands of locations that help create balance in the marketplace.

Back in July, Walgreens and CVS had 8,200 and 7,800 U.S. locations, respectively, which gave the companies at least 50% combined market share in 70 of the top 100 metropolitan areas. Since then, CVS has announced the acquisition of Target’s (TGT) 1,660 pharmacies, thereby deflecting the market share gains created from Rite Aid’s 4,600 stores in 31 states for WBA.

As a result, Walgreens should have no trouble purchasing Rite Aid, and has already said that it would be willing sell up to 1,000 Rite Aid stores to appease regulators. Most likely, WBA already planned to divest these stores to avoid overlapping pharmacies, and to meet its goal for cost synergies in excess of $1 billion annually.

With Walgreens paying less than 0.3 times this year’s $30.93 billion in expected sales for RAD stock, WBA will still be getting Rite Aid at a bargain price compared to its own valuation. WBA trades at 0.89 times this year’s expected sales.

RAD Stock Is a Perfect Merger Arbitrage Investment

The bottom line is that WBA is unlikely to have any problems acquiring RAD. This makes RAD stock a terrific opportunity for merger arbitrage, and because of the acquisition, it is protected from the stock downside that should have been created after that disappointing November sales report.

As a result, RAD stock does not have much downside risk from this point forward, but does have nearly 15% of upside over the next six months.

In looking throughout the market, that’s a rather safe investment, and a return that not many would turn down.

Brian Nichols owns shares of Rite Aid stock.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/12/rad-stock-investors-thanking-wba-right-now/.

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