Rite Aid (NYSE:RAD) soared to 13-year highs after it reported fourth-quarter earnings that exceeded expectations and issued bullish guidance for the upcoming year. As a result, Rite Aid's stock price has now risen by almost 500% since 2012. While considering comparisons with Walgreen (NASDAQ:WBA) and CVS (NYSE:CVS), can Rite Aid still trade higher and if so, how high could it go over the long term?

Could Rite Aid really go higher?
In an earlier article, "Is Rite Aid A Likely Acquisition Target," I looked at the vast improvements that Rite Aid has seen from an operational stance, which included macro-related events that boosted margins such as new generic introductions. The conclusion was that Rite Aid is in fact an attractive acquisition target.

However, an acquirer might not buy Rite Aid. While good acquisition value often signals investment value, investors will surely ask how much upside is possible given Rite Aid's near 500% return since 2012. The answer, based on Rite Aid's fundamental outlook and valuation, might just surprise you.

What did Rite Aid's earnings tell us?
Rite Aid's revenue growth for the last five years has been essentially flat, but in fiscal 2015 the top-end of its guidance implies an increase of nearly 4%, or $26.5 billion. Furthermore, the midpoint of its net income guidance is $368 million or a 47% increase year-over-year, which implies yet more margin growth.

Also, it's worth noting that Rite Aid has been notorious for underestimating its results during the last couple years, which makes the high-end of income guidance at $423 million more likely to be the outcome of fiscal 2015.

With that said, if we use its peak guidance for income and divide by its current market cap, we can find that Rite Aid trades at 16.2 times forward earnings. In comparison, CVS and Rite Aid trade at 15 and 16.4 times their forward earnings expectations, respectively. Therefore, Rite Aid is fairly valued, right?

Consider these three things
Unfortunately, investors can't just look at forward P/E multiples and assume that Rite Aid's run is over. Consider three things in particular: continued bottom-line growth, new-found revenue growth, and room for further margin improvements.

As previously said, Rite Aid is now guiding for substantial growth for the first time in a six-year period. With a 4% increase, Rite Aid's revenue will finish the year higher than it has been since before the recession. Also, CVS and Walgreen have both grown continuously during the last five years. Walgreen has grown more than 7% while CVS has grown a whopping 30% by expanding, acquiring, and partnering during this period. Yet, looking ahead, the year-over-year growth outlooks for these three companies are nearly identical.

With that said, Walgreen and CVS's profit margins over the last 12 months are about triple that of Rite Aid. Essentially, both Walgreen and CVS have been far more efficient and faster-growing companies than Rite Aid and they have been priced as such.

Now, Rite Aid is not only returning to growth, it also expects major bottom-line improvements while expectations call for CVS and Walgreen's margins to grow at much slower paces. Therefore, in valuing Rite Aid, you must account for not only its guidance and growth but also its room to improve, specifically in regard to its margins.

What's Rite Aid worth?
With all things considered, take a look at these pharmacies' guidance and price/sales ratios for this current year.


Revenue Expectations

Price/Sales Ratio


$132.9 billion



$75.82 billion


Rite Aid

$26.5 billion


In assessing these three companies to predict their upside, revenue offers a far more reliable way to gauge each company's expense because of the industrywide margin improvements and also the disconnect in margins between Rite Aid and its peers. Rite Aid is also notably cheaper because it has endured years of flat or declining revenue coupled with six consecutive years of net losses prior to 2012. However, it's a different company today. Despite its 500% return, Rite Aid is still priced significantly below where its peers are.

Therefore, as fiscal 2015 continues and margins increase, revenue growth becomes a reality, and even more new generics are introduced to the market and thus increase overall margins across the pharmacy industry, Rite Aid still has significant upside. However, determining how much upside the company has depends on what you believe its recovery is worth. As of now, the company is making a fast dash to catch up with its peers in terms of operating efficiency.

As a result, if you figure that Rite Aid's worth .5 times sales, which is still a major discount to CVS and Walgreen, then Rite Aid has upside of 100% or it could be worth $14 per share. If you think its new-found growth will continue, its margins will one day match those of its peers, and it's worth 0.75 times sales, then Rite Aid has 200% upside or it could be worth $21 per share.

Final thoughts
A price of $14 to $21 per share may sound outrageous to many, but it wouldn't be the first time people doubted my analysis. Back in 2012, my Motley Fool article called Rite Aid a buy at $1.40  with a target of $3. At $1.90, I laid out the exact formula  which showed what Rite Aid needed to reach $7 and then the company achieved what it needed with a profit margin of 1.5%. Then, while it traded at $2.30, in another article I called the $7 target.

Therefore, at $7, it's time to look ahead. If another company doesn't buy it, Rite Aid can continue to improve. If the company continues to improve it will achieve multiples similar to those of its peers, and in that event $14 is likely and $21 is possible.

Any way you look at it Rite Aid still trades at a major discount, and the stock can not trade high enough or rise fast enough to reflect its fundamental improvements. Therefore, while I can't determine exactly what price Rite Aid will hit, the one thing I do know, based on everything discussed here, is that it's worth way more than $7 a share.

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Brian Nichols owns shares of Rite Aid. The Motley Fool recommends CVS Caremark. 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.