Why Rite Aid Corporation (RAD) Stock Isn’t as Risky as You Thought

Rite Aid stock can still go higher without the deal

Pharmacy chain Rite Aid Corporation (NYSE:RAD) has seen its shares fall 42% over the past year as speculation about its impending takeover by Walgreens Boots Alliance Inc (NASDAQ:WBA) suggested that the deal would ultimately fall through. However, the failure of the WBA deal is far from certain, which has made potential RAD stock investors cautious.

But there are many reports suggesting that the deal will end up working out. As of April 6, Rite Aid stock jumped nearly 10% on news that Fred’s, Inc. (NASDAQ:FRED) remains committed to buying RAD stores (a part of the deal that is required for Federal Trade Commission approval).

If the deal does go through, investors that own Rite Aid stock stand to gain upwards of 30%, but if the deal is crushed RAD may have a tough time trying to move forward on its own.

So that begs the question — should traders gamble on Rite Aid stock?

The WBA deal is certainly the main reason anyone is talking about taking a position in RAD stock. Anti-trust concerns forced the two to amend their deal late last year. In the revised deal, WBA agreed to divest a portion of its stores to FRED and the buyout price was revised to $7 per share.

However, those watered-down terms are still looking pretty sweet for Rite Aid stock owners. RAD stock is currently trading at $4.60 at the moment because traders have abandoned the firm as the Federal Trade Commission review of the deal drags on, so getting in now would mean a big reward should the buyout deal go through.

RAD Stock: Is the Deal Going to Go Through?

That big payday will only come if federal regulators approve the deal, and considering they’ve been mulling it over for more than a year now, many believe the prospects aren’t looking good. With that said, while the length of time it has taken the FTC to evaluate the deal is certainly a concern, a New York Post report suggested that they will give the green light in just a matter of weeks.

Despite reports that the FTC may come around to the deal, RAD stock has remained below $5 per share as skepticism kept traders from getting too excited about the news. There’s still a good chance that the acquisition deal won’t go through, but I believe the market is being overly negative about its chances. WBA and RAD have made several concessions in order to appease regulators and the time it’s taken the FTC may be a sign that the Commission is willing to work with the two firms in order to get the buyout approved.

Bottom Line on Rite Aid Stock

Whether you believe that the buyout deal is going to happen, RAD is not as bad as it looks at its current valuation. Sure, the firm will struggle to compete against Walgreens if the buyout deal falls apart and the firm has a debt-heavy balance sheet, but at just $4.60 per share, Rite Aid stock is actually looking a bit undervalued.

Before the WBA deal was announced, RAD stock was trading at around $6 per share. However, the uncertainty surrounding the Walgreens buyout has caused investors to turn on Rite Aid stock. The firm’s earnings haven’t been stellar, but as CEO John Standley pointed out, the 17-month long FTC approval process has been arduous and created a “difficult operating environment,” which has weighed on the company’s bottom line.

RAD stock is definitely a speculative play, but it may not be as risky as many have pegged it to be. There is a chance that the firm’s share price will sink even lower if the WBA deal comes off the table, but even in that case, I’d expect to see Rite Aid stock recover somewhere close to its 2015 share price of $6 once the dust settles.

As of this writing, Laura Hoy was long RAD.

Article printed from InvestorPlace Media, https://investorplace.com/2017/04/rite-aid-corporation-rad-stock-isnt-as-risky/.

©2019 InvestorPlace Media, LLC