Just when it seems as if things finally have nowhere else to go but up for Rite Aid (RAD +0.00%) investors, another Wall Street pro waxes unenthusiastically about the market laggard. Andrew Wolf at Loop Capital initiated coverage of the reeling drugstore chain with a Hold rating.
Wolf feels that the unraveling of its deal to be acquired by Walgreens Boots Alliance (WBA +0.00%), and the subsequently reworked deal to sell just some of its stores to Walgreens finds Rite Aid in a position where it has to start its turnaround efforts from scratch. Absent intermediate-term earnings visibility, he's not comfortable recommending the stock. Wolf is setting a price target of $2.50, which is a penny shy of where it closed on Monday.
If you're a risk tolerant investor willing to take a chance on Rite Aid you're probably not doing it for the benefit of just marching in place at the same price point.
Image source: Rite Aid.
The Rite stuff
Rite Aid stock seemed to have finally bottomed out earlier this summer. The shares had fallen for five consecutive months through the end of July -- plunging 63% along the way -- before rising higher in August. The stock is inching higher yet again in September. However, Wall Street isn't sold that Rite Aid's stock is on the rebound.
When UBS analyst Michael Cherny issued an update last month on the watered down asset sale between Rite Aid and Walgreens it was framed as a positive for Walgreens Boots Alliance. Cherny sees immediate accretion from synergy opportunities if regulators let this transaction go through -- for Walgreens.
A month earlier it was Ann Hynes at Mizuho downgrading the stock and Leerink's David Larsen suggesting that even the reworked deal may not clear the Federal Trade Commission's challenging hurdle. Regulators sat on the original $17.2 billion deal for nearly two years without giving it the green light. There's no guarantee that they'll sign off on a $5.175 billion deal that sends nearly half of Rite Aid's stores to Walgreens.
Between the pending $5.175 billion transaction and the $325 million that Rite Aid stands to collect as a penalty for the original Walgreens deal not going through there's a lot of Rite Aid's $9.7 billion enterprise value baked into this two-year ordeal. Rite Aid feels it has enough in net operating loss carryforwards to offset the tax hit on the asset sale. One would think that investors would realize that a Rite Aid with $5.5 billion coming in, keeping 52% of its stores along with its EnvisionRx pharmacy benefit manager, RediClinic, and Health Dialog subsidiaries would be worth more than it is right now.
Wall Street pros don't see it that way, but Rite Aid will get a chance to tell its side of the story. It announces financial results for its fiscal second quarter on Sept. 28, giving it the perfect platform to sell analysts on the future that they don't seem to be buying into at the moment.
