Rite Aid Corporation (RAD) Stock: Will it Go to Zero, or Is it Oversold?

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There’s been a lot of drama in the merger between Rite Aid Corporation (NYSE:RAD) and Walgreens Boots Alliance Inc (NASDAQ:WBA). As doubts lingered about whether the Federal Trade Commission would approve the deal, RAD stock continued to sink to new lows. After what felt like a lifetime, reports finally began coming out at rapid fire.

Rite Aid Corporation (RAD) Stock: Will it Go to Zero, or Is it Oversold?

Some said the FTC was going to file a lawsuit to block the merger. A few days later, another said it was likely to approve the deal. WBA management took matters into its own hands and began reworking the deal with RAD, agreeing to pay a $325 million termination fee.

Instead, Walgreens will now pay $5.175 billion in cash for 2,186 retail location, three distribution centers and inventory. Fred’s, Inc. (NASDAQ:FRED) has been cut out of the deal altogether, which allows WBA to expand its footprint. Management says it will realize more than $400 million in synergies.

Breaking it Down for Rite Aid

It’s clear to see why this may benefit Walgreens, but is it good or bad news for RAD stock? Assuming this deal finds approval, WBA says it will take about six months to close. A lot of comments suggest that investors feel fleeced under the current deal. The market shares the concern, with Rite Aid stock hovering about 20 cents per share above its 52-week low of $2.21.

In the end, Rite Aid will have approximately 2,350 stores remaining. However, management says it will still operate some of its best-performing locations, mainly on the West Coast and throughout parts of the Midwest.

If that’s the case — and that’s a big if — RAD could survive.

Let’s look at the whole picture. Last quarter, the company had total debt of $7.24 billion. The $5.2 billion directly cuts that figure down significantly, equaling almost 75% of the total sum. The $325 million breakup fee can also go toward the debt, but may make more sense to go toward the $214 million in cash. That gives the company more money in the bank and allows it have additional flexibility going forward.

In the deal, WBA is buying almost 50% of RAD locations. After subtracting cost of goods sold, RAD stock had a gross profit of $1.759 billion last quarter. Taking out SG&A expenses put it in the red as RAD ultimately lost $75 million though. The hope is that Rite Aid is left with more profitable stores — like management says — while also cutting its overhead costs significantly. That could allow the company to turn a profit and boost its gross margins.

I know these are big “ifs,” but Rite Aid could be looking at significantly reducing its debt and running a profitable outfit.

Trading RAD Stock

If that scenario is in the cards, the stock market isn’t buying it. RAD stock is down 19% in the past month and 70% this year. To say investors have doubts is an understatement. While its debt situation is not as dire as Valeant Pharmaceuticals Intl Inc (NYSE:VRX), it’s certainly not pretty.

Although some of its stores could be fine, it’s hard to believe Walgreens would buy Rite Aid’s worst-performing assets. In reality, it’s likely a blend for RAD. It’s steps are simple: reduce debt, cut costs, return to breakeven and boost margins. If management does that, Rite Aid could return to profitability. That should get shares of RAD stock rallying.

Who’s going to bet their money on that, though? I know I won’t be, even though this stock looks so oversold it’s not even funny. Investors could have made that argument at $5, $4 and $3. Next it might be $2. If anything, this deal buys RAD stock time, but unless it turns around its business, the stock is a no-touch.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/rite-aid-corporation-rad-stock-will-it-go-to-zero-or-is-it-oversold/.

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