When we first highlighted Rite Aid (RAD) - Get Report as a stock to avoid on May 21, we were immediately criticized by readers for missing the big-picture turnaround story and accused of being owned by the short-sellers who think this stock will ultimately prove worthless.
While we appreciate hearing the other side of the Rite Aid story, we were surprised that there are plenty of investors in this stock who expect it to return to its precorruption glory days of the late 1990s, when its share price soared close to 425% in the five-year period leading up to its collapse.
And here we are, six weeks since that first Rite Aid piece ran on
, with another quarter in the books, and the stock is trading a mere 10 cents higher at $4.93. While Rite Aid's first-quarter results looked promising on the surface, they weren't strong enough to support the initial 10% jump in the stock price. It looks like Rite Aid's shares may be headed back toward their May levels.
Ask us if we're surprised? During its first-quarter earnings report, Rite Aid lowered its full-year sales guidance to $17.2 billion to $17.4 billion from $17.4 billion to $17.6 billion. Management also lowered same-store sales growth estimates to 4.5% to 5.5% from 5.5% to 6.5%. It turns out the surge in mail order prescriptions along with other industry challenges is making it harder for Rite Aid to grow its business.
And despite the gains in EBITDA margins the company reaped from its operating cost controls, we certainly don't see any reason why investors would pay a premium multiple to own Rite Aid. Not with $4 billion in debt and lagging pharmacy sales that are keeping its expansion efforts behind industry leaders like
. Yet the stock is still trading in line with CVS, on the basis of its estimated EV/EBITDA of 7.5. While this is a discount to Walgreen, the two have polar-opposite balance sheets and sales results.
So we remain negative on Rite Aid as it continues to score poorly in the Fundamental and Alpha components of our proprietary rating system. The risk/reward here at $4.93 a share is not favorable enough to play either the long or short side. That said, we believe those shareholders betting Rite Aid shares are the right vehicle to make back at least part of the losses would do better to sell the stock and put the cash to work in other areas of the market.
If you check out our
, we have several stocks that we think would give you higher returns on your cash.
David Peltier and William Gabrielski report for the TSC Investment Team
David Peltier is a research associate at TheStreet.com. William Gabrielski is a research associate at TheStreet.com and is accredited with a Series 7 license. In keeping with TSC's editorial policy, neither owns or shorts individual stocks. They also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabrielski and Peltier welcome your feedback and invite you to send your comments to
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