We Fools often try to steer folks toward the leaders in any sector, so in the retail drugstore game, we haven't had a lot of good things to say about Rite Aid (NYSE:RAD). Compared with supercompetitor Walgreen (NYSE:WAG), the firm -- synonymous with scandal at the turn of the millennium -- has long looked absolutely wretched.
Nothing seems to change. At first glance, it's been a tough March. Earlier in the month, we got word that one-time exec Franklin C. Brown would be heading to the federal pen to serve a sentence for his part in the major accounting scandal of 2000. Then, today, we hear that Rite Aid's comps were up a measly 0.6% last month, after falling by an identical percentage for January.
CVS is doing better. Walgreen is doing much better. But let's not get overly concerned with the shining stars.
Exactly how bad is Rite Aid's brand of bad? Is it possible that the stock is a value? I'm not sure I've got the answer to that, but there are encouraging signs for those willing to sort through the mess.
Let's take that for granted and look deeper. With Rite Aid's enterprise value-to-sales ratio of 0.3, you'd have a tough time finding anything cheaper. But there's a good reason for that. Sales growth still stinks. Margins stink, too -- sort of. They are far below the numbers that peers are putting up, but look at the trend. Since 2001's disastrous -12.2%, net margins have improved steadily to 0.6% today. Not impressed? Hey, there's still room for improvement. Debt? There's a ton of it. But the firm has been working to pay it down and restructure it at better terms.
It can afford to do that because it's actually churning up some decent free cash flow -- $452 million over the past 12 months, by my calculations. That yields an enterprise value-to-free cash flow ratio of around 12, which is also pretty inexpensive when compared with the market and its peers.
None of this puts the stock on my personal buy list, but it ought to be enough to raise the eyebrows of anyone who likes to hunt for value. If Rite Aid can turn its sales around even slightly, or simply become a bit more profitable on the flat revenues, the current share price might suddenly look really cheap.
For related Foolishness:
- Watch out for Walgreen.
- It's easy being (Wal)green.
- Should you kick this drug habit and reject Rite Aid?
- Enjoy a classic Rite Aid mad-lib.
Seth Jayson likes the thrill of the chase, but at the time of publication, he had positions in no company mentioned. View his stock holdings and Fool profile here. Fool rules are here.
