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Why Goldman Sachs Likes Rite Aid Even More Now

Jon C. Ogg

Rite Aid Corporation (RAD) is a turnaround which keeps on turning. That is the theory from Goldman Sachs at least. The brokerage firm upgraded shares of the retail drug store to Buy from Neutral. Perhaps more important is that the price target was raised to $8 from $5 in the call.

What stands out the most is that the prior highest analyst target price was $7 before the upgrade. That makes Goldman Sachs' Robert Jones the highest price target of all analysts when it comes to Rite Aid.

As a reminder, Rite Aid posted a same-store sales gain of 1.5% in February. That is impressive when you consider how many retail stores were hamstrung by weather. Front-end store sales were down, which are traditional retail consumer products items, but drug sales were the boost even when you count the generic impact.

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To show just how much this is in turnaround mode, Rite Aid trades at only about 0.25-times revenue. Walgreen Co. (WAG) trades at more than 0.8-times revenue. That does not imply that Rite Aid would be expected to double or triple and still be cheap compared to Walgreen. But that is how turnaround stocks can have so much implied upside.

Goldman Sachs likes the store remodeling that has been seen so far, and the upgrade continued to discuss deleveraging. The NOLs (net operating losses) have to be factored in as well.

Rite Aid shares were up 7% at $6.90 in late Wednesday trading right before the closing bell, and the stock hit a new 52-week and multi-year high of $6.95. Rite Aid is still worth only $6.65 billion in market cap, and the 33 million shares traded is over 1.3-times a normal trading day's volume.

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