Overview
Rite Aid (RAD) announced its May and 1st quarter sales results on June 5th, and even though sales comps increased vs. the prior year, the company lowered its full year net income, diluted EPS and EBITDA guidance, based on preliminary Q1 results. The company's stock was subsequently hammered, going from a June 4th closing price of $8.5 to Monday's closing price of $6.99 -- an 18% drop in only 8 trading days. Obviously, the market and a lot of investors were very disappointed. Investors must now perform a review of this new information and determine if Rite Aid is still worth owning from an investment perspective. Financial metrics are a very good and important starting point for investment decisions, but a qualitative review of industry and company specifics are also needed. I'd like to refer readers to my previous articles on Rite Aid that provide the additional information and context to assist in their investment decision: RAD's significant upside in 2015 highlights my views on the stock price potential for the company, RAD's growth story starts outlines the company's growth initiatives, and Data-mining Rite Aid's 10k provides additional details from Rite Aid's annual report. The information in these articles, combined with this detailed review of the new guidance, will provide current Rite Aid investors and followers the information to make a fact-based and informed decision on whether Rite Aid still warrants owning from an investment potential.
In this article, I will review Rite Aid's guidance change in detail, along with updated financial metrics and a comparison to CVS (CVS) and Walgreen (WAG). I hope this will provide a proper analysis for investors to make an informed decision. All information is sourced from Yahoo Finance unless otherwise noted.
Guidance Change
I would first like to review the original and revised guidance, highlighting the changes as well as updated financial ratios based on the current guidance and yesterday's closing stock price. The table below summarizes the key metrics in the company's FY 2015 guidance, which was provided in its April 10, 2014 Q4 Earnings Release and subsequently revised on June 5th, when Q1 sales results were released.
| Metric | Original Guidance | Revised Guidance | Change |
| Same Store Sales increase - Low | 2.50% | 2.50% | 0 |
| Same Store Sales increase - High | 4.50% | 4.50% | 0 |
| Adjusted EBITDA - Low | $1,325 | $1,275 | -3.77% |
| Adjusted EBITDA - High | $1,400 | $1,350 | -3.57% |
| Net Income - Low (Ms) | $313 | $298 | -4.79% |
| Net Income - High (Ms) | $423 | $408 | -3.55% |
| Diluted EPS - Low | $0.31 | $0.30 | -3.23% |
| Diluted EPS - High | $0.42 | $0.40 | -4.76% |
| Diluted EPS - Midpoint | $0.365 | $0.350 | -4.11% |
| Stock price-June 4th vs. June 16th | $8.50 | $6.99 | -17.8% |
| P/E Ratio - June 4th vs. June 16th | 23.3 | 20.0 | -14.2% |
| FY 2014 EPS | $0.23 | $0.23 | N/A |
| Earnings growth - midpoint of mgmt's guidance June 4th vs. June 16th | 58.7% | 52.2% | -11.1% |
| PEG Ratio | 43.4% | 37.2% | -14.2% |
I have highlighted the key fields that I think are the most relevant. Rite Aid's growth rate based on management's revised guidance is now in the low 50%+ vs. the high 50% range -- still an exceptional growth rate that most companies would love to forecast. The company had previously noted that earnings would be stronger in the 2nd half of the year as its growth and operational initiatives start to kick in. These initiatives include: increased private brand development and Wellness store remodels, RediClinic expansion in Rite Aid Drugstores and the Rite Aid Health Alliance partnership with Health Dialog. As the data shows, the P/E and PEG ratios based on the current stock price and lowered guidance show that Rite Aid's stock price is now an even more compelling value than it was prior to the revised guidance. This indicates that the current sell-off in the stock is overdone and the stock is very cheap to its underlying growth rate. I would consider selling the stock only if there were some indication of a more material change in the company's operating results, but with total sales having grown 2.6% in the 1st quarter, it does not seem likely that the low-end of the earnings guidance is in jeopardy.
Current Valuation and Competitor Comparison
Industry factors strongly impact a company's stock performance and valuation metrics, and I always recommend a peer comparison or industry average (vs. an overall market metrics) to determine whether a stock is under- or over-valued. Some industries are always cheap or have a high dividend yield -- e.g., utility stocks and industry comparisons are much more meaningful than overall market comparisons. I have included the top 2 competitors for Rite Aid in the retail drug store space -- Walgreen and CVS, and the table below summarizes how Rite Aid compares to its top competitors.
| Metric ($ in Billions,except per share amounts) | RAD | WAG | CVS |
| 6/16/14 Closing price- | $6.99 | $73.29 | $76.14 |
| Market Cap - | 6.80 | 69.94 | 89.31 |
| Less tangible BV* - | -2.6 | 18.4 | 10.1 |
| Market Cap net of tangible BV - | 9.40 | 51.54 | 79.21 |
| 2013 FY EPS ($) | 0.23 | 3.12 | 4.00 |
| 2014 FY EPS ** | 0.35 | 3.44 | 4.46 |
| EPS Growth Rate | 52.2% | 10.26% | 11.50% |
| BV adjusted FY 2014 PE Ratio - | 26.9 | 15 | 17.8 |
| PEG Ratio - | 0.52 | 1.46 | 1.55 |
| Cash Flow (CF) - | 0.70 | 4.30 | 5.80 |
| Price to CF | 9.7 | 16.3 | 15.4 |
| Dividend Yield - | N/A | 1.40% | 1.70% |
| Source Yahoo Finance | |||
| *BV=Most Recent Quarter | |||
**2014 FYE-RAD=2/15, WAG=8/14 and CVS =12/14; EPS - RAD=midpoint of mgmt. guidance, WAG & CVS = Average of analyst estimates | |||
As the table shows, even after adjusting for tangible book value, the PEG ratio for Rite Aid is still extremely cheap compared to WAG and CVS. Rite Aid also has the fastest earnings growth rate, and the company's balance sheet and related book value will also be improving rapidly as the earnings are used to pay off debt and invested for future growth. Thus, the industry comparison shows Rite Aid's stock as being cheap as well.
Based on these valuation comparisons, the question becomes, why the sell-off? Several reasons come to mind, the first being the stock has had quite a run since the beginning of the year -- 68% from January 1st to the June 4th high of $8.50, and even after the sell-off, it is still up 38% year to date. Second, Rite Aid has received a lot of positive media attention lately and no doubt attracted a lot of momentum traders/investors due to all the positive press. Once bad news came out, a lot of those momentum traders sold, thus allowing long-term, patient, investors an excellent buying opportunity. Fundamentally though, I see no reason for investors to have sold the stock down to such cheap levels, for a company that only slightly reduced its guidance and still has a best in industry growth rate and PEG ratio.
Conclusion
I believe the sell-off in RAD is overdone and the stock is selling at a very attractive price. The mid-point of the company's revised diluted EPS was only 1.5 cents (4.1%) lower and the stock has sold off by 18%, resulting in a PEG ratio that is now much lower than before the revised guidance. I anticipate that once the earnings growth returns in the 2nd half of the year, the stock price will rebound to at least its old high of $8.50.
As stated previously, I believe that financial metrics and analysis are only a starting point for investment decisions, and I encourage investors to perform additional due diligence before investing. My previous articles provide useful, detailed information for investors to make an in-depth assessment of the company. These articles can be found at the following links: RAD's significant upside in 2015; RAD's growth story starts, and Data-mining Rite Aid's 10k. Also, if you are interested in another undervalued stock, please read my article on American Capital.
I hope you find my articles useful and I invite you to follow me by clicking on the "+ Follow" icon at the top of this article (to the right of my picture). The settings in your seekingalpha.com profile can also be adjusted to receive e-mail alerts when I post new articles. As always, your comments and e-mails on my articles are always appreciated.
Disclosure: The author is long RAD. 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.
