Will Rite Aid Soar Past Walgreen and CVS in 2014?

After huge gains in 2013, does Rite Aid have an encore for return-hungry investors? Find out whether the drugstore chain can keep defying rivals CVS Caremark and Walgreen in 2014.

Jan 8, 2014 at 10:49AM

Rite Aid (NYSE:RAD) put in an amazing share-price performance in 2013, with its stock almost quadrupling during the year. Yet even with the drugstore chain making huge progress last year in establishing itself as a potential survivor in the industry, Rite Aid still must face intense competition from Walgreen (NASDAQ:WBA) and CVS Caremark (NYSE:CVS) that has threatened to limit its growth for years.

Rite Aid's breakout year in 2013 resulted from the company finally delivering on its turnaround promise, returning to profitability and encouraging investors with its future prospects. But late in the year, Rite Aid started giving shareholders reasons for concern, as some of the favorable factors that had helped boost the drugstore chain's fortunes began to subside. Without that support, the main question investors have is whether Rite Aid can keep growing or whether a pullback is inevitable. Let's take a closer look at Rite Aid's prospects for 2014.

Rad

Stats on Rite Aid

Average stock target price

$5.64

Full-year fiscal 2014 EPS estimate

$0.22

Full-year fiscal 2015 EPS estimate

$0.34

Full-year fiscal 2014 sales growth estimate

0.1%

Full-year fiscal 2015 sales growth estimate

0.8%

Forward P/E

15.6

Source: Yahoo Finance.

What's in store for Rite Aid in 2014?
Analysts don't see Rite Aid having much upside potential left after its huge run last year, with the target stock price representing just a 6% rise from current levels. That level of upside isn't drastically different from what analysts show for Walgreen and CVS Caremark, but unlike Rite Aid those two stocks pay dividends, adding to the potential total return for investors in 2014.

Rite Aid also raised some new concerns in its most recent earnings report, released just before the end of 2013. Overall revenue for the third quarter climbed almost 2%, thanks largely to a 3.5% jump in pharmacy same-store sales, although front-of-store figures fell 0.2%. Yet guidance for the full fiscal 2014 came in below expectations, with earnings expected to hit between $0.17 and $0.23 per share.

Much of the challenge for Rite Aid comes from diminishing tailwinds from favorable industry factors. In the past several years, a huge number of high-profile pharmaceuticals have come off-patent, opening the door to generic competition. That's good news for Rite Aid, because generic drugs actually provide Rite Aid with higher margins than branded pharmaceuticals. More recently, the flood of new generics has slowed somewhat, and generic manufacturers have also boosted their prices, cutting margins for Rite Aid and its peers.

In addition, Walgreen and CVS have identified Rite Aid as a continuing threat and are therefore ramping up their competitive efforts. In an attempt to bolster its own poor performance in front-end sales, Walgreen has run more promotions to sell nonprescription items in its stores, sacrificing gross margin in order to boost sales volumes. Both CVS and Walgreen have used their loyalty programs in efforts to capture more long-term customers, helping Walgreen reverse the damage from its 2012 dispute with pharmacy benefit specialist Express Scripts. Rite Aid has its own loyalty program and will fight back against competitive pressures, but changing conditions in the industry will still make that fight harder than it was in 2013.

In the end, Rite Aid is highly unlikely to duplicate 2013's huge gains this year. Whether the chain can sustain its current price level without giving back ground in 2014 depends largely on its overcoming more difficult conditions and still boosting profitability. Without convincingly producing earnings growth, Rite Aid's 2013 could turn out to be a one-hit wonder for the stock.

Get smart in 2014
Rite Aid was a good stock in 2013, but there's still a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Click here to add Rite Aid to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Express Scripts. The Motley Fool owns shares of Express Scripts. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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