Rite Aid (RAD, Financial) is the third-largest drugstore chain in the U.S. with stores in 4,570 locations. It sells both prescription and nonprescription drugs as well as other retail merchandise. Currently the stock is trading at a P/E multiple of 57.33x; while comparing it with peers on PEG ratio it is a rather cheap stock to buy, and it has upside potential of 13.65% from the market price of $7.74.
In the first quarter the company reported revenue of $8.2 billion, up by 23% on a year-over-year basis but missed estimates by $80 million. In addition to the sales miss, there was a miss on earnings by 4 cents. Net income came in at a loss of $4.6 million, or less than a penny per diluted share. On an adjusted basis, adjusted net income was $14.5 million, or 1 cent per share while adjusted EBITDA was $286 million, or 3.5% of revenues.
Stock performance
Management Profile:
Rite Aid’s catalyst
Remodeling of stores
The number of Rite Aid stores in the U.S. declined from 5,000 in 2008 to 4,570 by the end of 2014 as Rite Aid commenced liquidating its nonprofitable stores. A majority of the analysts expect that this trend will continue over the next couple of years as Rite Aid continues to evaluate store performances and close its underperforming stores. In order to improve same-store sales, Rite Aid is remodeling its stores. It has been remodeling its stores since 2012 and so far it has remodeled 2,126 stores to its new wellness format, which includes unique merchandising display.
Margins improve with the sale of generic medicines
Over the last three years the percentage of generic medicines in a typical consumer’s prescription has increased by 9% since 2012. We can see that trend of generic medicine is quite slow; however, if one prescription will give us an average profit of $5, we will find improvement in EBIT margins by 10%.
Acquisition of EnvisionRx increased burden of debt
Rite Aid front end same-store sales have improved over the last two years and have been narrowing losses. The improved performance is aided through the wellness program, store remodeling and closure of highly underperforming stores. The company reported significant reduction of debt in 2012; however, with the acquisition of EnvisionRx it has added to the company's debt, but the cash flow generated over the long term will offset this impact.
Major contributor: Prescription drugs
One of the major contributors to Rite Aid’s revenue is prescription drugs. The U.S. has an aging population and older people contribute to a larger portion of expenditure on drugs. This will lead to an increase in the prescription drugs market in the U.S. It is estimated that in 2017 4.63 billion prescriptions will be filled annually; if Rite Aid gets 7.34% of it, revenue will increase to $38.11 billion, and the company will have a free cash flow of $1.56 billion. With the recent acquisition of Envision Rx, Rite Aid’s acquisition cost for prescription drugs will be reduced by 9.27% by 2017.
Rite Aid currently trades at a premium to peers, given its higher-than-peer growth profile. Rite Aid deserves to trade at a target EV/EBITDA multiple of greater than 11.58 multiple, compared to its peers. This suggests a 13.56% upside to its price of U.S. $7.74. A DCF-based valuation yields an intrinsic value of $8.79.
As of March, Mario Gabelli (Trades, Portfolio) is Rite Aid's leading shareholder among the gurus with 0.10% of shares outstanding) followed by Pioneer Investments (Trades, Portfolio) with 0.09%, George Soros (Trades, Portfolio) with 0.05% and John Paulson (Trades, Portfolio) with 0.03%.
Note: The above image of stock performance is taken from Yahoo! (YHOO, Financial) Finance. Image representing hedge postion is taken from GuruFocus data.
Other images are taken from Rite Aid's investor presentation.Â
Disclosure: While writing this article I didn't hold any position in the above mentioned stock, nor do I have any plans to invest in the organization for next 72 hours.
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