Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Are Rite Aid's Rally Days Now Over?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Rite Aid (NYSE: RAD  ) investors were totally shocked on Thursday when the stock declined 10% after earnings. By all measures, Rite Aid released yet another phenomenal quarterly report, thus showing the progress that's been made in such a short period of time. Yet given the loss, investors now have to wonder if Rite Aid's rally days are over and if they should turn their attention to Walgreen (NASDAQ: WBA  ) or CVS Caremark (NYSE: CVS  ) instead?

Earnings overview
Rite Aid announced earnings at 7 a.m., and almost immediately the stock fell 5%. At that time, the only fundamentals known or processed were top- and bottom-line results, both of which were solid beats, thus leaving investors to wonder why Rite Aid was falling so sharply.

This question becomes even more difficult to answer when you dig into the quarter. Rite Aid hit a home run on every single metric possible. The company beat estimates, posted same-store-sales growth of 2.3%, pharmacy sales rose 3.5%, and script same-store sales even rose 0.7%.

All of these additional metrics of improvement were not present late last year or earlier this year, back when Rite Aid's uptrend first began. Therefore, the only way to logically explain Thursday's action is to say that expectations were just a little too high.

Are the rally days over?
The problem with the "increased price equals higher expectations" theory is that Rite Aid is still very cheap.

When we look at the two larger pharmacies, Walgreen (NASDAQ: WBA  ) and CVS Caremark (NYSE: CVS  ) , we'll see two companies growing same-store sales, growing revenue, and improving profits, much like Rite Aid. Granted, Walgreen and CVS Caremark are performing better.

Walgreen reported earnings on Friday, the day after Rite Aid, and its total revenue rose 5.9%, driven by strong growth of 7.3% in prescription sales. And while Rite Aid has somewhat struggled in its front-end store business, Walgreen's retail segment grew 2.4%.

CVS Caremark has yet to report earnings, but the company did give an update on Dec. 18. CVS Caremark boosted its dividend by 22% -- now paying a yield of 2% -- and also announced plans to buy back approximately $6 billion in stock. Moreover, in November when CVS Caremark reported earnings, the company saw its total revenue rise 5.8%, pharmacy revenue rose 7.8%, and its retail business saw a 5% jump.

If we look at Rite Aid's quarter, it is not seeing pharmacy growth of 8%, revenue rise 5%, and it's surely not paying a dividend or buying back stock. Therefore, CVS Caremark and Walgreen are in fact the better businesses, but the key is that they should be.

Both CVS Caremark and Walgreen are expected to grow total sales by more than 5% in 2014; Rite Aid is guiding for growth of about 0.5%. However, Rite Aid has not soared 300% in the last year because of its revenue growth. Instead, it has been due to margin improvements and the company's remarkable progress from losing $368 million in 2012 to posting net income of more than $300 million during the last four quarters.

Yet, despite Rite Aid's fundamental progress and valuation gains, the stock trades at just 0.2 times sales while both Walgreen and CVS Caremark trade at 0.7 times sales. Therefore, the question of whether or not Rite Aid still has more upside potential, or if the stock's rally days are over, depends on if investors believe a one-third premium to its peers is an appropriate valuation for the stock.

Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Read/Post Comments (1) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 23, 2013, at 3:47 PM, truevaluetoday wrote:


    The more I visit the RAD locations the more impressed I am on the positive changes from impeccaably clean floors and well stocked shelves to very attentive store workers and extra friendly personnel. The store within a store agreement with GNC is now good through 2019, The wellness center is driving in more traffic and the overall layout of the stores blow away the WAG and CVS stores in the same area. I think if Management continues to execute wise moves and more Store within a store ideas out of the box...they will really start to capture more business from WAG and CVS. Continue to focus on prime locations and continue to drive in more business by being cost competitive and only hire those who want to see this underdog win big over the next few years.

    Thanks for the great call on RAD! I think your conservative view of longer term $7.00 could be met sooner as RAD lowers expecations and then exceeds with laser focus and operational excellence!

    Per below you said it best back in June 23, 2013!

    "The bottom line is that Rite Aid is now profitable. The six years of net loss that drove its stock from $6 to $1 is now a thing of the past; as the company has greatly improved operationally".

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2775229, ~/Articles/ArticleHandler.aspx, 10/1/2016 9:58:31 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 12 hours ago Sponsored by:
DOW 18,308.15 164.70 0.91%
S&P 500 2,168.27 17.14 0.80%
NASD 5,312.00 42.85 0.81%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/30/2016 4:04 PM
CVS $88.99 Down -0.56 -0.63%
CVS Health CAPS Rating: *****
RAD $7.69 Up +0.12 +1.59%
Rite Aid CAPS Rating: ****
WBA $80.62 Up +1.41 +1.78%
Walgreens Boots Al… CAPS Rating: ****