Rite Aid Corp. (NYSE: RAD) has been a troubled stock in a difficult financial position for over a decade now.  So, it tends to stand out when research firms act very positively on it.  Credit Suisse reiterated its Outperform rating with a $2.00 price target.  This implies upside of 61% from the current $1.24 share price.

With a small gain in same-store sales, this was slightly disappointing according to Credit Suisse.  The firm thinks that a larger than expected impact from new generics and a small calendar shift were part of the trend and the firm believes that the underlying trend appears to be intact.

There is a Walgreen Co. (NYSE: WAG) and Express Scripts Holding Company (NASDAQ: ESRX) angle here.  Credit Suisse notes, “The company continues to benefit from the WAG/ESRX dispute. The generic impact accelerated 95 bps sequentially, which should help pharmacy profitability. We continue to rate Rite Aid Outperform. While a fundamental turnaround still seems difficult, we believe the stock represents an attractive near-term buy as it stands to capitalize on the WAG/ESRX dispute, the generics wave, and company sales initiatives. The stock could also benefit from continued M&A speculation (we believe a takeout by Walgreens could eventually make sense).”

Was that a takeover comment in a research report?  We have noted this in the past that if Rite Aid could restructure its debt that it would be worth many more times what its equity value is worth today.

Credit Suisse ultimately believes that this trend of name brand drugs rolling off into generics will end up being a net positive for Rite Aid.  It was also noted that promotional levels were slightly below the trend seen in recent months, so advertising and marketing costs are down. Credit Suisse sees EBITDA of $255 million in the first quarter and $975 million for the full year.

While some analysts have been positive and negative, this story is one that has been long and painful for many shareholders.  The $2.00 price target actually compares to a Thomson Reuters consensus target of $1.99, so this is not as ridiculous as it may sound compared to peers if you dig a little deeper.  The equity value of $1.1 billion always seems low with $25 billion in expected 2012 and 2013 sales and that is because it has $9.9 billion in total liabilities.

Rite Aid has been on our long-term list of turnaround companies which have just never been able to turn around.

JON C. OGG

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