Rite Aid Corporation (NYSE:RAD) finds itself a distant third in terms of drug store numbers, valuation, and profits. Walgreens Boots Alliance Inc (NASDAQ:WBA) and CVS Health Corp (NYSE:CVS), Rite Aid’s most direct competitors, dominate the retail drug store market. However, the competitive disadvantages, coupled with its struggles as it tried to sell itself, have driven the RAD stock price to low levels.
Given the price of RAD stock is off more than 16% in the last six months, investors could find a trade here — and little else.
Rite Aid faces a well-unknown but rarely discussed problem. The company lacks what the French call a raison d’être, or reason for being. CVS and Walgreens have established dominance in the retail drug store market. Moreover, Wal-Mart Stores Inc (NYSE:WMT), Target Corporation (NYSE:TGT), Costco Wholesale Corporation (NASDAQ:COST), Kroger Co (NYSE:KR), and many other retailers also sell prescription drugs. If Rite Aid disappeared tomorrow, retailing wouldn’t miss a beat.
However, that fact alone does not fully answer the question: “Should I buy Rite Aid stock.” The company still operates about 4,600 stores in more than 30 states and the District of Columbia. It remains the largest drugstore chain on the East Coast.
What Remains of Rite Aid Has Value
The company has also dealt with rumors that Amazon.com, Inc. (NASDAQ:AMZN) could enter the prescription drug business. As a competitor to Rite Aid, Amazon’s presence would further rattle investors. However, an Amazon takeover solves their raison d’être issue. The store footprint could serve as a retail store for Amazon prescription drugs, the way Whole Foods Market is beginning to play a ever-growing role in Amazon grocery sales.
Moreover, RAD stock’s valuation creates an opportunity to trade this equity, possibly at a large profit. Its fall to under $1.60 a share gives it a market capitalization just shy of $1.7 billion. As my InvestorPlace colleague, Lawrence Meyers pointed out two weeks ago, this places the value of Rite Aid’s remaining stores at $5.87 billion.
Long a Target of Buyer Interest
Additionally, the debt-to-equity ratio will improve after receiving the cash proceeds. The current debt burden stands at around $7.1 billion. This level of liability places the ratio at a dangerously high 375%. That’s assuming the cash from selling the stores takes the debt level to $2.8 billion. While a ratio of almost 150% is still high, it’s a more-manageable figure that falls well below 100% if the stock’s value goes back above $5 per share.
RAD stock news indicates it’s been a buyout candidate for some time. In October 2015, Walgreen’s announced it was buying Rite Aid for $9.4 billion, or $9 share. They canceled that merger before later agreeing to buy 2,186 of their stores. The stock lost more than 12% of its value when the Federal Trade Commission (FTC) recently adjusted the deal to 1,932 Rite Aid stores at a cost of $4.375 billion. These proceeds amount to more than twice the market capitalization of RAD stock and less than half of the company’s store footprint.
Additionally, Rite Aid’s performance remains strong enough to hold out for other buyers. The company broke even on its diluted earnings per share (EPS) in 2017. Current projections place 2018 RAD earnings at a loss of 10 cents a share and a 2019 profit of 4 cents per share. While not impressive, the company performs well enough to at least delay its demise.
Profitable RAD Stock Trade
While Rite Aid’s decline still appears inevitable, valuations are such that a profitable trade in RAD stock remains possible. The company has steadily lost ground to its competition for years. It does not appear poised for any kind of turnaround. However, with the remainder of the company believed to be worth almost $6 billion even after many of its stores are sold shows that room exists for RAD stock’s $1.9 billion market capitalization to grow.
Rite Aid is not a suitable investment for conservative or long-term stockholders. However, investors who want a quick and likely profitable trade should consider a position in RAD stock.
As of this writing, Will Healy was long RAD stock.