Why Rite Aid Is a Bad Investment

| About: Rite Aid (RAD)

While CVS (NYSE:CVS) and Walgreen (WAG) thrive in the drugstore industry, there is one large company that continues to struggle in the space. Rite Aid (NYSE:RAD) just cannot get out of its own way. Walgreen has a stock price of over $40 per share and a yield of 1.7%; CVS Caremark has a $35 share price and a yield of 1.4%. Rite Aid has a share price of $1 and could only hope to join the ranks of other dividend stocks. Rite Aid is set to announce earnings today, and I expect another poor report.

Rite Aid is expected to report a loss of 24 cents per share today. Investors cannot put much stock in that number, as the company has always failed to live up to even poor earnings expectations. I have been stating for years that Rite Aid’s only hope is a bankruptcy filing.

At first glance, the company looks like a decent buyout candidate. The company has a market cap of only $960 million and a strong brand name. A closer look reveals that the drugstore chain has over $6 billion in debt and has an enterprise value of nearly $7.5 billion. That’s too steep a price for Walgreen or CVS to pay.

Rite Aid is expected to lose 52 cents per share for the current year, despite revenue projections of more than $25 billion. Rite Aid is trying to solve its operating woes by closing unprofitable stores. The company has closed hundreds of stores over the past few years and has still failed to make a profit.

Rite Aid is eerily similar to Blockbuster (BBI) and Borders (BGP). The company appears on the path to bankruptcy. With over $100 million in cash and $360 million in cash flow, Rite Aid can fend off bankruptcy for a little longer. A filing, however, appears inevitable.

Investors should be cautious with this stock. Penny stock investors will be tempted to buy shares hoping for a rebound. I would avoid the stock, as the company is still a wreck.

Even at $1 a share, Rite Aid appears overvalued.