Rite Aid Is in Full Recovery Mode

NEW YORK (TheStreet) -- Rite Aid (RAD) shares have surged after reporting fantastic results for the last quarter.

The company left the intensive care unit from 2012 when the shares traded for about a buck and shareholders wondered if the pharmacy would make it through to the other side. Rite Aid is now a prescription for continued profits, its shares at a healthy $7, up 39% for the year to date.

RAD Chart

Adding fuel to an already impressive increase in price is a 50% income beat of 6 cents per diluted share for a total of $55.4 million on revenue of $6.6 billion. That compares to analysts' predicted 4 cents for the fourth quarter ending March 1.

For the full fiscal year, the company earned 23 cents per diluted share ($249.4 million) from $25.5 billion of revenue.

The question now weighing on shareholders is whether to take the money and run or hold out for more. It's a legitimate concern considering the 10% opening morning gap on Thursday. At the time of writing, shares are trading slightly below the $7.18 open, a bearish indication after a move higher of this magnitude.

Not surprising, given the over 600% rise in share price during the previous 16 months. TheStreet's Jonathan Heller believes you shouldn't get too bullish, and he is probably right about the easy money already being made. But that doesn't mean an oversized return isn't still on the table.

Rite Aid is transitioning from survival mode to a growth and expansion strategy that, if successful, will take the share price into the double digits. Let me show you how.

RAD Free Cash Flow Per Share (TTM) Chart

Rite Aid's free cash flow is superior compared to Walgreen (WAG) and CVS Caremark (CVS) on a price per share basis. Bears are quick to point out the discount is due in part to Rite Aid's relatively large debt load and interest expense. They're correct, but the market is forward looking and the company's debt load is shrinking fast.

At the end of fiscal year 2013, total liabilities amounted to $9.54 billion, of which $5.9 billion was long-term debt obligations. By the end of fiscal year 2014 on March 1, total liabilities had fallen to $9.06 billion, with $5.63 billion in long-term debt. That's about $300 million in debt reduction over the last year, and the debt isn't convertible.

In other words, investors should not anticipate a large dilution impact from that portion of the debt. It will take time but at the rate of progress, Rite Aid's debt load could be in line with its peers much quicker than the market is discounting the shares at.

Wall Street hates uncertainty, and it's the reason why the shares fell to under a dollar and why it's only about $7 now.

RAD Revenue (Quarterly) Chart

That said, shareholders have some certainty to hang their hats on. Same-store sales improved 2.1% over the same period last year, and between openings and closings, the store count was 4587 on March 1. Rite aid's management has shifted gears from defense to the offense with the purchase of Health Dialog and RediClinic that is bullish for the stock.

While Rite Aid's shares face headwinds because of its debt load, expanding revenue and earnings should allow shares to "climb a wall of worry." If you're a long-term investor, I would hold tight because this success story isn't over yet.

At the time of publication the author had no position in any of the stocks mentioned.

Follow @RobertWeinstein

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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