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Why Rite Aid Corporation (RAD) Stock Isn’t a “Bargain Trade”

The severe beatdown of RAD stock doesn't make it undervalued with or without a buyout

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Earlier in March, when it looked like Walgreens Boots Alliance Inc (NASDAQ:WBA) may not be allowed to acquire Rite Aid Corporation (NYSE:RAD) after all, RAD stock took a hit … a big one. All told, Rite Aid stock is still down 16% for the month, and down a whopping 41% just since the end of 2016. All of that weakness ultimately stems from the distinct possibility its merger plans are apt to be upended.

And yet, with that giant-sized pullback, an interesting question has surfaced — is RAD stock a buy with or without the Walgreens buyout based simply based on its stunningly low price?

Investors have certainly justified crazier trades than that.

RAD Stock Below Offer Price

Just for the record, if you’re compelled to step into a position in RAD stock at its current price of $4.89, you’re not crazy. Walgreens’ most recent firm offer is somewhere between $6.50 and $7.00 per share, depending on how many stores it has to sell to appease the antitrust hawks.

There are two potential pitfalls to the strategy, though.

One of the key risks to such a trade is simply that the final purchase price per share isn’t etched in stone.

You may recall the initial offer price was $9.00 per share. That figure has drifted lower in the meantime, reflecting a combination of the ongoing deterioration of the drug store chain’s business and the increase in the number of stores the duo would need to shed to appease the Federal Trade Commission. The latest chapter in the saga indicates the lower offer price based on the sale of 825 units. As the number of stores on the chopping block grows though, the per-share buyout offer sinks.

The other risk? The biggest risk is that a deal doesn’t get done, in which case the value of Rite Aid stock will rest entirely on the company’s laurels. That’s a problem simply because there haven’t been many laurels to speak lately. Still, near a two-year low, surely the worst-case scenario already has to be baked in.

Then again, maybe it doesn’t.

Rite Aid Is a Sub-Par Performer on Own

As compelling as a speculation may be here at an uber-low price for RAD stock, it’s ultimately a bad bet for one key reason. That is, Rite Aid is a habitual loser in the pharmacy game.

The graphics below compare the operating and net margins of Rite Aid, Walgreens Boots Alliance and CVS Health Corp (NYSE:CVS). Although Rite Aid’s gross margins are relatively healthy, the company is alarmingly disappointing when it comes to its net profits.

RAD stock Gross Margins

RAD stock Net Margins

The persistence of the underperformance indicates systemic trouble that’s tough (if not impossible) to solve.

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