Seeking Alpha
, Twitter (94 clicks)
Long/short equity, value, contrarian, research analyst
Profile| Send Message|
( followers)  

Summary

  • Rite Aid has fallen roughly 6% on the news of Walgreen reaching a deal with Alliance Boots.
  • Although this deal will benefit Walgreen, Rite Aid's long-term bull thesis remains intact.
  • I did not previously anticipate this acquisition being announced.

This morning, Rite Aid (NYSE:RAD) has fallen roughly 6% on the news of Walgreen Company (NYSE:WAG) buying the remaining 55% of Alliance Boots for $15.3 billion. The deal marks Walgreen's first move into international markets, and would create the world's biggest buyer of prescription drugs. RAD fell due to concerns that the acquisition will give WAG superior buying power and will allow it to undercut RAD. Although WAG will benefit from the deal, RAD's bull thesis remains, and it provides an exceptional buying opportunity amid this pullback.

The entire industry is set to benefit from the influx of newly insured Americans, due to the seminal Affordable Care Act legislation, as well as a shift to higher-margin generic prescriptions. Although Walgreen will have a larger global footprint and could benefit from buying power, the industry tailwinds will allow Rite Aid to outperform. Moreover, the recent deal signed between RAD and McKesson (NYSE:MCK) will improve RAD's buying power, as McKesson is one of the largest buyers in the market.

In my previous article: "Rite Aid: Take Advantage Of A Myopic Market," I discussed the numerous tailwinds that would allow Rite Aid to exceed expectations. This recent pullback provides further evidence of the myopic nature of the markets, as the deal should ultimately have a negligible impact on Rite Aid's future. Investors should be delighted with this news, as it provides an opportunity to either average down or enter at this new significantly undervalued level.

Source: Update: Rite Aid Slips On Walgreen Deal