Rite Aid Corporation (RAD 20.00%) shareholders can celebrate big gains of more than 30% for 2015 headed into the last few days of the year thanks in part to a blow-out third quarter. However, some investors might still be disappointed. Why? Because the stock of the nation's third-largest pharmacy retailer was up over 60% year-to-date in June before falling dramatically. Could Rite Aid soar in 2015 like it started to do in the first half of 2014? Here are three reasons why the recent momentum could extend into the New Year.
Source: The Motley Fool
1. Improving profit margins
One of the best ways to turbocharge a stock is to excite investors about the potential for higher earnings. And one of the best ways to get those higher earnings is to make more out of every revenue dollar go to the bottom line. Rite Aid is clearly on the right track on that front.
RAD Profit Margin (Quarterly) data by YCharts
This positive trend should be sustainable. Rite Aid's purchasing deal with McKesson (MCK 1.16%) has the potential to squeeze more profits in the months and years ahead. Availability of more generic drugs in 2015 will also help the company improve margins. Combined, these two factors should drive higher profit margins, which will drive higher earnings -- and that could drive share prices higher in the coming year.
2. More customer spending
Another great way to propel earnings and stock prices higher is to achieve strong revenue growth. Rite Aid also seems likely to make strides on this front in 2015.
With more Americans obtaining health insurance coverage as a result of the Affordable Care Act, pharmacies in general should continue to gain new customers. Rite Aid has already seen comparable store sales increase partially of a result of higher utilization in states that opted to expand Medicaid.
Rite Aid continues to remodel stores to follow its Wellness store concept. These Wellness stores claim higher sales and prescription growth than the company's other stores. The pharmacy retailer plans to continue the remodeling program into 2015, which should help keep customer spending in its stores on the upswing.
3. Appealing value proposition
With the major indexes near all-time highs, it wouldn't be surprising for institutional and individual investors alike to begin focusing on stocks that are more attractively valued. Rite Aid should be able to attract some of that value-play interest.
Of the three largest pharmacy retailers, Rite Aid boasts the lowest price-to-earnings multiple. Walgreen (WBA 3.69%) stands as the most expensive with a trailing P/E of 36. CVS Health (CVS 1.49%) comes in second with an earnings multiple of 24. Rite Aid's P/E of 22 beats both of its larger rivals.
Those are all trailing earnings multiples, though. Rite Aid really shines with a future perspective that factors in the company's growth potential. Analysts surveyed by Thomson Reuters give Rite Aid a P/E-to-growth (or PEG) ratio of 0.47 -- around one-third as high as that of Walgreen and CVS and lower than most other stocks.
Granted, future-oriented metrics can be way off. However, the growth prospects for Rite Aid do appear solid enough to warrant viewing the stock as a reasonable long-term "growth-at-a-reasonable-price" play.
Fly in the ointment?
These three factors could point to a sizzling performance for Rite Aid in 2015. However, there is one major obstacle that could prevent the stock from soaring next year: the overall market performance.
Historically, Rite Aid's stock hasn't been able to swim against a current of a declining market. Rite Aid appears to have several ingredients for success, but broader headwinds could prove to be a fly in the ointment. Despite this risk, the positives for Rite Aid merit a close look by long-term investors.
