Few companies look as decisively bad as Rite Aid Corporation (NYSE:RAD), and yet maintain a dichotomous consensus. The most obvious gut reaction to RAD stock is to jump ship. After all, not too many firms are able to absorb a nearly 73% loss year-to-date and still keep ticking.
Despite its horrendous hemorrhaging in the markets, people are still buying Rite Aid shares. For instance, analyst recommendations were somewhat split between the bulls and the holders up until this month. Finally, after the failure of the original Rite Aid and Walgreens Boots Alliance Inc (NASDAQ:WBA) deal, a modest number of analysts got bearish on RAD stock.
Quite frankly, I’m surprised that the number of RAD naysayers are as few as they are. As InvestorPlace contributor Will Ashworth discussed, Rite Aid could have gone with a myriad of scenarios.
“Walgreens and Rite Aid called off their merger but made a secondary deal instead that where WBA will buy 2,186 RAD stores for$5.2 billion. Also, Walgreens will pay Fred’s, Inc. (NASDAQ:FRED) a $325 million termination fee for ending its agreement to sell the Tennessee discount retailer and pharmacy as many as 1,200 Rite Aid stores.”
Ashworth’s argument is lucid and straightforward. Rite Aid got into this whole mess because they couldn’t hack it with Walgreens, Fred’s, and CVS Health Corp (NYSE:CVS). Now, we are to buy RAD stock because management is going to accomplish their original goal with half the footprint. On that context alone, it simply doesn’t make a lick of sense.
Indeed, Ashworth recommended taking a tax-benefit loss, so murky is RAD stock.
The Bull Case for RAD Stock
Several of my colleagues agree with the bearish point of view, each providing their own nail to the coffin. But for those who are hoping for a revival, not everyone is “doom and gloom” on RAD stock.
Our own Richard Saintvilus believes that Rite Aid is a “no-brainer buy,” and he is quite emphatic about it. That got my attention, in part because RAD is so intractably ugly, and also, because I thought it was clickbait. I initially thought Saintvilus would deliver a punch line, but it never came. His assessment should be read at face value. Not only that, he disclosed that he’s long RAD stock.
As much as I previously doubted the pharmacy company, Saintvilus’ arguments are logically valid. Although RAD stock suffered a severe decline following the Walgreens fallout, the fundamentals didn’t increase in awfulness. Rather, they improved dramatically.
Saintvilus writes that with “Walgreens instead deciding to buy roughly half of Rite Aid’s stores, from which the latter can use proceeds to pay down debt, Rite Aid’s fundamental metrics can drastically improve.”
Ashworth, on the other side of the debate, concedes this point. A lower debt exposure gives the company “time to come up with a better plan to deliver for shareholders.”
RAD still has to utilize the money they’ll receive from the revised deal wisely. But if they do, management can clean up the balance sheet and potentially generate positive cash flow. And under the terms of the deal, “Walgreens gives Rite Aid a 10-year window to buy prescription drugs through Walgreens, paying the same price that Walgreens pays.”
If they play their cards right, the pharmacy could either turn around their business or become an attractive buyout target. Did I hear someone say Amazon.com, Inc. (NASDAQ:AMZN)?
Perception Is Everything
With all that said, I’m still doubtful on the turnaround concept. Sure it’s possible, I just don’t think it’s highly probable. Pharmacies depend on coverage and volume. Again, to Ashworth’s point, if they couldn’t make it at full capacity, why would they make it at half capacity?
Should the company make it beyond the aforementioned 10-year window, they’d face another major challenge. InvestorPlace contributor Lucas Hahn writes that the current terms “will leave Rite Aid much smaller in an industry where size matters. The bigger a drugstore is, the more bargaining power it has with drug wholesalers. More bargaining power means lower costs for the pharmacy.”
I dare to say that most analysts believe that RAD stock has little chance of being a standalone powerhouse in a decade’s time. But if we throw that element away and simply consider that RAD needs to survive long enough, the perception changes.
In other words, this is not about taking the checkered flag; it’s merely making it to the next pit stop.
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Going long RAD stock is still a huge gamble. Multiple times, investors wagered on a bottom, only to see shares crater. You’d be betting that “this time, it’s different.” Still, there are worse things you can speculate on. If you can stomach the risk, RAD might work out for you.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
