In this article, let's take a look at Rite Aid Corporation (RAD, Financial), a $7.74 billion market cap company, which operates a chain of retail drugstores in the United States.
Strategic move
In February, the company agreed to acquire Envision Pharmaceutical Services, a pharmacy benefit manager. The $2 billion deal will help to reduce purchasing costs, and we think this should boost earnings while improving operating scale of the business.
Revenues and EPS
Looking at profitability, revenues rose by 5.26% and led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.10 vs $0.04).
Net income
The net income decreased by 37.8% in the third quarter, when compared to the same quarter one year prior (from $104.85 million to $71.55 million).
Margins
The gross profit margin is considered low, at about 30%, but it has increased from the same quarter the previous year. The net margin, which is a good indicator of the competitiveness and health of the business, was at 1.57%, at the end of November 2014.
Profitability
Finally, let´s see a measure defined by Joel Greenblatt (Trades, Portfolio): the Return on Capital, which he analyzed it differently in his book “The Little Book That Still Beats the Market (Little Books. Big Profits).” He defined Return on Capital as EBIT divided by the total of net fixed assets and net working capital.
The formula is: Return on Capital: EBIT/(Net Working Capital + Net PPE – Excess Cash)
So, let´s compare the ROC which is one of the most important measures of the efficiency of a business and should be an important tool for investors.
| Ticker | Company | ROC (%) |
| RAD | Rite Aid | 20.70 |
| COST | Costco Wholesale Corp | 23.66 |
| CASY | Casey's General Stores Inc | 15.56 |
During the past 13 years, the company´s highest ROC was 23.78%, the lowest was -42.94% and the median was 4.21%. The firm has a ROC higher than Casey's General Stores Inc (CASY, Financial), but lower than Costco Wholesale Corp (COST, Financial).
It is very important to understand this metric before investing, and it is important to look at the trend in ROC over time.
| Year | ROC (%) |
| Feb-05 | 13.66 |
| Feb-06 | 10.60 |
| Feb-07 | 10.06 |
| Feb-08 | 5.05 |
| Feb-09 | -42.94 |
| Feb-10 | 0.28 |
| Feb-11 | 0.55 |
| Feb-12 | 4.17 |
| Feb-13 | 17.51 |
| Feb-14 | 19.84 |
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 25.68x and its price-to-sales ratio of 0.32x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $50,662, which represents a 38.4% compound annual growth rate (CAGR).
Final comment
Although we saw principal weakness when analyzing the profit margins, the company has a good ROC, as well a good valuation levels.
Hedge fund guru like Louis Moore Bacon (Trades, Portfolio) and NWQ Managers (Trades, Portfolio) bought the stock in the last quarter of 2014. Other investors like Paul Tudor Jones (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) have taken long positions in that period.
Disclosure: As of this writing, Omar Venerio did not hold a position in any of the aforementioned stocks
