Hey! Good for you regarding Rite Aid. That’s as cool as a moonbeam. Rite Aid Corp. (RAD-$2.90) started to move up in late January as word circulated that management pulled the pharmacy chain out of a multiyear profit slump. RAD has roughly doubled from the January price of $1.43. However, I wonder why Executive Vice President Brian Fiala and Chairwoman Mary Sammons sold 692,000 shares and 750,000 shares, respectively, last April at $2.46.
RAD, with $25.3 billion in U.S. sales and 4,700 stores in 31 states, earned 12 cents a share for the 2013 calendar year. But since its $3.9 billion purchase of 1,850 Brooks Eckerd drugstores in 2007, RAD has lost a total of more than $5 billion. And this is the first time in six years that the company has earned a profit. But the $64 question is: Can it continue? The answer: Yes! However, the next question is: Will it continue? And the answer: I don’t know. Although, based upon an impressive stock performance, RAD deserves the benefit of the doubt.
Apparently, Standard & Poor’s, Reuters, Ned Davis Research, Credit Suisse, Market Edge and Charles Schwab agree. Each has a “buy” or an “outperform” on the stock. Of course, Walgreen Co. and CVS are very positively rated, too.
The drugstore industry, a monopoly in most cities, is working through a tough environment. CVS, Walgreens and Rite Aid have been losing lucrative “front-of-store” business to discounters and non-drugstore chains such as Wal-Mart and Costco. Why spend $3 for toothpaste, $6 for mouthwash, $7 for shampoo, $3 for soap, a buck and a half for candies, $4 for batteries, etc., when these and other items can be bought for a buck at Dollar General? Last year, RAD generated 68 percent of its revenues from its pharmacy (with Obamacare, the drug business is zooming) and 32 percent from front-of-store merchandise. Those are about the same percentages as Walgreens and CVS have. However, RAD distinguishes itself from them through its emphasis on its 2,900 private-label brands,
Sentiment: Strong Buy
-Obamacare does not start until 2014
-The drug business is not booming, a small growth in top line is expected in 2013 after a drop in 2012 worldwide.
-None of the major drug store chains are showing very strong growth in the top line for front end or pharmacy sales on a per outlet basis.
-the pop in profits for all of the chains is coming almost exclusively from the margin improvement on drug sales as there are a number of drugs that are going off of patent protection and generics are becoming available
The trend has even helped the price of freds, another pharmacy stock that has been stuck in the mud for many years.
How long the margin improvement will run should tell you what to expect from RAD in the short term as continued margin expansion will help cash flow even with flat sales. The way they manage the windfall will
tell whether the stock continues to get healthier.If they use the cash to pay down debt and start adding new outlets they can move from continued shrinking sales to growing total sales much in the way the other 2 major chains are.
The funny thing is that the margin expansion due to generics is something that many of the analysts should have seen coming , but did not seem to see until after the stock had run up and in most of the new buy recommendations no one is outlining how the margins should change of the next few years for the drug sales side of the business.That is the info that should tell people how strong of a buy the stock should be.
How can the writer say the drugstore industry is a monopoly in most cities. Monopoly means only one vendor. You find a Walgreens and chances are you'll find a CVS across the street and a Rite Aid not too far away, Add to that the local grocery stores that have pharmacies along with the local Wal-Mart. Doesn't sound like a monopoly to me.