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Could the “New” Rite Aid Corporation (RAD) Go Broke?

It’s less likely with the sale of stores, but that doesn’t mean RAD stock is a good value play

RAD stock - Could the “New” Rite Aid Corporation (RAD) Go Broke?

Source: Shutterstock

Let’s assume that the Federal Trade Commission rubber-stamps the revised deal between Rite Aid Corporation (NYSE:RAD) and Walgreens Boots Alliance Inc (NASDAQ:WBA). What does that mean for RAD stock?

Could the “New” Rite Aid Corporation (RAD) Go Broke?

InvestorPlace contributor Ian Bezek sees this is a very good thing for Rite Aid and Rite Aid stock as it severely reduces the company’s debt while allowing it to keep most of its more profitable locations. Addition by subtraction goes the theory.

At the same time, however, there are still naysayers in the investment community that wonder about Rite Aid’s chances of survival even after lowering its debt burden.

“There still is plenty of talk going around on social media about Rite Aid going bankrupt, but this simply doesn’t make sense,” Bezek wrote August 11. “Assuming Rite Aid pays down debt with the $5.5 billion in cash, its remaining Debt/EBITDA ratio would fall to around industry medians — very close to CVS Health Corp (NYSE:CVS).”

RAD Stock and the Odds of Bankruptcy

You don’t have to be a financial genius to know that Rite Aid will have a stronger balance sheet after the sale of 2,186 of its stores than before merger talks with Walgreens. That’s a given. But will it be enough? I’ve gone ahead and done an Altman Z2-Score for Rite Aid before receiving the $5.5 billion in cash from Walgreens. The Altman Z-Score and its various alternatives such as the Z2 are used to evaluate the likelihood of companies going bankrupt.

Altman Z2 Score Before Store Sale

RAD

Working Capital

1,969,000,000

Total Assets

11,460,000,000

Retained Earnings

-5,300,000,000

EBITDA

957,000,000

Market Cap

N/A

Total Liabilities

10,900,000,000

Net Sales

32,442,000,000

Book Value

561,000,000

X1

0.17

X2

-0.46

X3

0.08

X4A

0.05

Calculation

0.23

Source: Morningstar.com

In the non-manufacturing version of the Altman Z-Score, any number less than 1.1 suggests a company is at risk of bankruptcy within the next 24 months.

So, Rite Aid did the Walgreens deal to save itself from potential bankruptcy. Now that that arrangement is off the table and the present deal is on it, the clock is ticking.

If RAD doesn’t get the go ahead from the FTC, the likelihood of bankruptcy continues to be high. If it does go through, the Z2-Score will increase from 0.23, and its debt-to-EBITDA ratio will drop by two-thirds from 7.5 to 2.3, making its chances of survival much higher.

Rite Aid Lite

In my last article about RAD stock, I was very skeptical about the company’s chances to deliver for shareholders. I see Rite Aid as a mediocre operator in an industry that’s owned by Walgreens and CVS.

My colleague sees it differently, and it’s possible that he’s right. If the store sale goes through, Rite Aid’s EBITDA as a percentage of revenue will increase by approximately 200 basis points from 3.4% based on $1.1 billion in EBITDA and $32.4 billion in revenue to 5.3% based on $750 million in EBITDA and $14.1 billion in revenue.

That compares favorably to Walgreens whose EBITDA in the trailing 12 months is $7.3 billion on $116.7 billion in revenue.

Should You Buy Rite Aid Stock?

Rite Aid is not a stock that I would ever consider because it’s an also-ran in a very competitive marketplace.
Yes, RAD’s balance sheet will be much stronger after the sale of its stores, but it will generate most of its business in just two states, which means it will go from being a big regional player to a much smaller one.

At $2, if you’re a speculator, you might have a play. Everyone else needs to steer clear of Rite Aid stock. It’s not worth your time despite the fact it probably won’t go broke.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/08/new-rite-aid-corporation-rad-broke/.

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