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Comparing RAD, WAG, CVS: RAD has the most potential; WAG is experiencing unstable times; CVS stability is priced in.

RiteAid moving from $6.33 now to $7.50 in September and $9.20 in early 2015 before likely reaching $12 later in 2015.

LEAPS for Fun and Profit provide a great vehicle for benefiting from the anticipated RAD price increases.

My purpose in writing articles for Seeking Alpha is to share with others the knowledge and insights I have gained just like others shared with me their knowledge and insights. If you find this information and my insights helpful, then great . . . please share your knowledge and insights with others. By sharing we can all grow and do better than we can individually. Please add your comments that will help others in their investment decisions.

Company Profiles

This article focuses on RiteAid (NYSE:RAD) and uses a comparison of RiteAid, Walgreen (WAG) and CVS (NYSE:CVS) as a tool. Much of this information comes from Yahoo and FinViz.


  • 50,000 employees, 4,600 stores
  • 11 employees per store (total employees/# of stores)
  • $6b market cap (property, plant & equipment: $2m)
  • $1.3m market cap per store


  • 173,000 employees, 8,700 stores
  • 20 employees per store (total employees/# of stores)
  • $59b market cap (property, plant & equipment: $12m)
  • $6.8m market cap per store


  • 130,000 employees, 7,700 stores
  • 17 employees per store (total employees/# of stores)
  • $91b market cap (property, plant & equipment: $8.6m)
  • $11.8m market cap per store

The "employees" numbers listed above are full time employees as listed in SEC reports. In addition, each company has many part time employees. Since the relative comparison is what is important, I have used full time employees since I don't have the information needed to calculate Full Time Equivalents.

I note the significant difference in the employees per store (average full time employees per store includes corporate employees and all shifts) and suspect the lower ratio for RAD is a function of cost cutting necessary to achieve profit status which they did last year. I expect that as remodeled stores come on-line and sales improve that we will see this ratio increasing followed by further increases in sales.

The very large differences in market cap per store and PPE (property, plant & equipment) could be a function of sales and ownership. I have not researched the ownership approaches of each of the three companies.

Research and observations from others is appreciated.

Current Pricing

  • RAD: $6.33 Down 26% from early June high of $8.50
  • WAG: $61.75 Down 19% from mid June high of $76
  • CVS: $78.91 Currently at a high

Reasons for Recent Drops

RAD: Transition to McKesson for long term savings; Large investor sale of RAD stock (moving on to other stocks); WAG lower earnings and lower guidance

WAG: Cancellation of corporate move out of USA; Lower earnings and lower guidance


Earnings and Price to Earnings Ratio

I like to look at my own calculations of Price to Earnings ratios (NYSE:PE) so that I can better understand the basis for comparing similar companies. Below are my calculations.


  1. Management: $0.30 to $0.40 (say $0.35) current year
  2. Actual: $0.04 last quarter
  3. Analysts (Yahoo): $0.35 current year,$0.07 current quarter, $0.10 next quarter, $0.46 next year
  4. PE Ratio:
  • 18 Current price/annual earnings
  • 40 Current price/last qtr X 4
  • 23 Current price/current qtr X 4
  • 14 Current price/next year earnings


  1. Management: NA current year
  2. Actual: $0.91 last quarter
  3. Analysts (Yahoo): $3.31 current year, $0.76 current quarter, $0.76 next quarter, $3.68 next year
  4. PE Ratio:
  • 19 Current price/annual earnings
  • 17 Current price/last qtr X 4
  • 20 Current price/current qtr X 4
  • 17 Current price/next year earnings


  1. Management: $4.43 to $4.51 (say $4.47) current year
  2. Actual: $1.13 last quarter
  3. Analysts (Yahoo): $4.49 current year, $1.13 current quarter, $1.21 next quarter, $5.06 next year
  4. PE Ratio:
  • 18 Current price/annual earnings
  • 17 Current price/last qtr X 4
  • 17 Current price/current qtr X 4
  • 16 Current price/next year earnings

These PE ratios indicate that CVS is consistent and that the consistent earnings are priced into the stock. A solid investment but not a company that will see significant stock price increases.

The ratios also indicate that WAG is a little more volatile with some upside potential as it recovers from recent news.

The PE ratios for RAD confirm that RAD is more volatile with much more potential as its PE for next year increases from 14 to 16 or 17 and then up to 19 or 20. Using a PE of 20 applied to next year's estimated earnings indicates a stock price increase from $6.33 to $9.20. Likely earnings beats will increase this stock price estimate. For example, earnings of $0.70 (certainly within reach) will result in a stock price of $14.


The calendars for the three companies include the following events:

  • RAD: Earnings September 18; Monthly same store sales September 4
  • WAG: Earnings September 30; Monthly same store sales September 4
  • CVS: Earnings November 4; Annual Analyst Day 12/16/2014

RAD and WAG will both provide August sales information on September 4. RAD will lead with its earnings report on September 18. I am anticipating that RAD will continue to show increased year over year same store sales increase (4.6% reported for July sales). This consistent increase in sales will help propel RAD stock upward. The real news will come at the September 18 RAD earnings report. I anticipate that they will beat analysts' estimates of $0.07 by one to three cents. This will likely push RAD stock back up to the $7.50 range in September.

RiteAid to Reach Tipping Point in 2015

RiteAid's work to remodel about 250 to 300 stores per year (~$400m cap ex) as well as adding wellness features will support RAD's continued increase in profits followed by increases in sales. Slightly over 1/4 of RiteAid stores have been remodeled. The store remodel effort will reach what I consider a tipping point towards the end of calendar 2015 when approximately half the stores will be remodeled Wellness Centers. The new image of RiteAid resulting from the remodels will help propel sales and profits upward.

Management is making a concerted effort to provide customers a more positive store experience through the remodels and through employee relations. Communications between management and employees is increasing as together they explore ways to improve the customer experience. I look forward to seeing the positive impact of this employee/management communication on store sales and profits.

LEAPS - A Vehicle for Increased Profits

LEAPS are Long-Term Equity Anticipation Securities. They are options that expire at least a year out. Most people, including me, stay away from short term options due to the high timing risk associated with short term options. Long term options provide more time for a positive move in the direction of the stock.

I always advise people that options are risky and a person should only put as much money into LEAPS as they are comfortable loosing since an investor can lose everything invested into a stock option. The good news is that the amount invested is all that an investor can lose. For example, lets compare an investment in RiteAid made in May 2014 and sold in August 2014. If you purchased a RAD Jan 2016 $10 strike in May the cost would have been ~$1.20 per share. If you bought that same share the cost would have been $8.50. In August if you sold the option ($0.55), you would have lost $0.65 per share. If you sold the stock ($6.30), you would have lost $2.20 per share. The stock would have been a worse investment since you would have lost almost four times as much by owning and selling the stock compared to owning and selling the option.

Now let's look at the brighter side - the up side. If you buy RAD Jan 2016 $10 strike now for $0.55 (stock $6.33) and the stock by January 2016 increases to $12 (you don't have to hold the option to expiration), how much will you earn? For the stock your return would be 90% ($6.33 becomes $12) - pretty good. For the option your return would be 260% ($0.55 becomes $2) - much better.

If RAD goes to $14 as hypothesized above, then the Jan 2016 Strike $10 goes from $0.55 to $4.00 . . . a 7 fold increase.

However, remember that if the stock only goes to $10 then you lose your entire investment in the option as it will expire worthless. I make it a practice to sell options way before their expiration date to minimize the risk of last minute drops in share price.

As an example of the level of volatility in LEAPS, the Roth IRA account that I use for LEAPS investments started at $100k in mid 2013. It dropped to $69k before rising to $120k. Then it went on to $150k, $200k, $300k and $400k before dropping to $105k in April 2014. Finally it climbed to $600k where it routinely fluctuates from $550k to $630k. LEAPS have a lot of potential and a lot of risk.

My other LEAPS investment is Intel (Intro, Progress, Latest).

Each of the LEAPS below have approximately the same ratio of strike price to current price of 1.58 except CVS (they only have options up to $115 not $125 [$78.51X1.58]).

  • RAD: Jan 2016 $10 Strike: $0.55 Open Interest: 18,590 Volume: 115 (High: $1.25 Early June 2014)
  • WAG: Jan 2016 $96 Strike: $0.61 Open Interest: 6,160 Volume: 6 (High: $3.10 Early June 2014)
  • CVS: Jan 2016 $115 Strike (highest available): $0.18 Open Interest: 12 Volume: 0 (High: NA)

This information indicates that both RAD and WAG seems to be good LEAPS investments if you think that each of them has an equal chance at having their stock increase 58% over the next 17 months. I happen to think that RAD stock has a better chance of dramatically increasing in value over the next 17 months so I have purchased quite a few RAD Jan 2016 $10 strike options.

Disclosure: The author is long RAD, INTC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.