Is Rite Aid Heading in the Right Direction?

Jim Cramer said Friday that he thinks that Rite Aid (RAD) could hit 10 dollars. Cramer believes that the expected completed acquisition of Brooks and Eckerd drug stores next month could lead to the raising of earnings estimates by analysts. With this news I've decided to take a closer look at Jim's #2 speculative stock pick of the year.

On April 12th Rite Aid reported 4th Quarter Fiscal 2007 results in which the company missed their estimates by reporting a penny short on consensus estimates. Nonetheless, last Friday, the stock made a near 4 percent move to the upside, so let's take a look at the catalysts for this upside momentum.

1. Current divestiture of stores sits at 24, this is far less than what many analysts had expected.
2. Synergy savings raised up from $150 million to $225 million.

I believe these two items, the expected May acquisition closing, and some short covering were key to Friday's move. However, let's take a look at some of the other positives in this stock, as well as the negatives.

Positives:

The addition of Brooks and Eckerd will give Rite Aid approximately 5,000 stores, still less than CVS (CVS) and Walgreens (WAG) but not too far behind

Company expects Fiscal 2008 "year long" open store sales to increase 3.8 to 5.8 percent

Company expects Brooks and Eckerd acquisition to add 18 to 20 cents per share profit to Fiscal 2009 earnings

After the acquisition, Rite Aid will close stores that compete to close to one another, that will impact earnings short term, but is good long term strategy

Negatives:

Due to acquisition costs, Fiscal 2008 earnings are expected at a loss between 11 to 23 cents per share

Rite Aid is highly leveraged

Faces acquisition risks

Still a turn around story, will have to turn around Eckerd

CVS and Walgreens are fierce competitors

Rite Aid's debt is definitely concerning, but that's why it's a $6 stock. CVS and Walgreens will certainly not make things easy for Rite Aid either. As Jim Cramer says it's "speculative" - Rite Aid is continuing its long trek as a turnaround story.

Both Jim Cramer and Fast Money's Guy Adami have been thoroughly impressed by Rite Aid's CEO Mary Sammons. Sammons certainly has her work cut out for her, but she does seem to have the company headed in the right direction.

Speculation is high risk; the stock was up about 10 percent last week so I'd like to see it come in a bit. If it does, I may join the speculation game and take my chances on Rite Aid.

RAD 1-yr chart

Disclosure: none

Comments

[juddmiller:]

Thanks for the article.

I love the Rite Aid story. Not only do I agree with all of your positives, but interestingly, I found four of your five "negatives" to be positives in my mind as well.

1. Acquisition costs/lower 2008 earnings (will keep the share price low while I continue to build my position)
2. Rite Aid is highly leveraged (Rite Aid has been doing an excellent long-term job of reducing their debt, demonstrating consistent discipline and effective management)
3. Faces acquisition risks (Wow, this to me is a nice upside. If Rite Aid doesn't increase it's own multiple through earnings, it could be taken over, which would be a nice bump to the stock. I'll take the cash either way.)
4. Still a turn around story, will have to turn around Eckerd (Their experience turning around Rite Aid makes them an excellent turnaround team for Eckerd, though integrations (separate from turn-arounds) always have unknowns)

I accept that Rite Aid is a speculative buy, but I am very, very bullish on Rite Aid. I'm in a long-term acquisition stage with Rite Aid now, and while I get a quick flush of joy when its stock nudges upward, actually it bums me out, because I'm not done filling up the truck.

-- Hotwheels71 (long Rite Aid, and looking to get longer)

2007 Apr 16 01:11 PM