Rite Aid Corporation (NYSE:RAD) enters 2018 as a different investment proposition following the sale of about half its business to Walgreens Boots Alliance Inc. (NYSE:WBA).
Rite Aid is smaller, for one thing. A stock with a market cap of $2.3 billion is nothing like one near $10 billion — what it was as recently as 2016.
In this state, buying and selling pressure moves RAD price more easily. It’s more fun to trade, as a move to $2.50 from its January 11 opening price of $2.20 would be gigantic. But it’s also off the front page, and you’ll have to dig to find meaningful news on it.
The earnings report for the quarter ending December 2 turned out to be somewhat meaningless, because not all the assets in the Walgreens sale have been transferred. Same store sales, however, were down, with lower pharmacy sales and drug reimbursements.
A Troubled Company
The sale to Walgreenes left behind a mess and a huge operating concern. Now, it’s best to call Rite Aid a “bi-regional” company, as it remains big in the northeast and on the west coast, but will be gone from the south, the plains, and much of the midwest.
It’s a small wonder why management is talking up its pharmacy benefit manager (PBM), EnvisionRX. Snaring some Medicare contracts could position EnvisionRX as a “growth engine” for the entire company.
But there’s a problem with that.
EnvisionRX’s PBM business is currently in a terrible position.
The industry is not what it was before UnitedHealth Group Inc (NYSE:UNH) bought Catamaran in 2015. United is the biggest health insurance player, by far, and all its business went to Catamaran after that purchase. Once its acquisition is complete, all the business of Aetna Inc (NYSE:AET) will be going with CVS Health Corp (NYSE:CVS). Even the biggest Medicare-Medicaid provider, Centene Corp (NYSE:CNC), owns its own PBM.
EnvisionRX is left fighting with the much larger Express Scripts Holding Company (NASDAQ:ESRX) for scraps.
Waiting for a Takeover
The PBM market and the untenable bi-coastal retail footprint are why Rite Aid bulls are left praying for a takeover.
There was hope that Amazon.com, Inc. (NASDAQ:AMZN) might buy it, mainly for EnvisionRX, but that has yet to materialize. In theory one of the other health insurers — Anthem Inc (NYSE:ANTM), CIGNA Corporation (NYSE:CI), or Humana Inc (NYSE:HUM) — could want it for its RediClinics and Envision.
But this is all speculation.
InvestorPlace’s Will Healy says cash from the Walgreens sale gives Rite Aid time to consider its next move carefully. That’s true, in theory, but you wind up investing in a company with nothing to live for but its own demise, and such companies have a tough time with operations.
The Bottom Line
The chart-watchers, like IP’s James Brumley, are telling traders to get in on the Rite Aid action in the short term. If you are going to buy RAD, I agree with Brumley’s stance.
I disagree with Will Healy’s belief, however, that Rite Aid has cash, space and time to catch its breath and wait.
The present company is untenable and cannot survive for long.
The board could decide to split the retail operation in two, or split the whole company in three — the clinics, the PBM, and the stores — to show value and put itself in the shop window.
If Rite Aid is still around in its present form as 2019 opens, it won’t be worth nearly as much as it is today. If you’re going to speculate on a sale, hope that one happens quickly.
The buyers hovering around it know this, and should only pounce when they see a bargain.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he is long AMZN.