Rite Aid Corp. (NYSE: RAD) is one of the nation’s leading drugstore chains, with nearly 4,600 stores in 31 states. It has been in the midst of a huge turnaround over the past few years. As a result, Credit Suisse has decided to weigh in Rite Aid.
Rite Aid reported its same-store sales for the month of May just this past week, but they what analysts were expecting.
Credit Suisse reinstated coverage of Rite Aid with an Outperform rating and a $10 price target, as the firm believes that the stock provides one of the more compelling risk-reward profiles in its space.
The firm detailed in its report:
The company has made good progress on its turnaround and we expect further improvement as management pushes forward with numerous, traffic-focused initiatives. The recent acquisition of EnvisionRx only enhances the company’s outlook, as the retail/PBM combination has been proven as the leading model and should provide long-term market share opportunity for the combined entity. While we believe the fundamental outlook alone is enough to entice investors, M&A provides another realistic avenue for upside potential. We continue to believe the industry is poised for more consolidation with leading players on the prowl, and see RAD as one of the most likely targets.
Rite Aid currently trades at 10.8 times Credit Suisse’s reduced NTM EBITDA estimate, which is about in line with the multiple from CVS Health Corp. (NYSE: CVS) and almost two turns below Walgreens Boots Alliance Inc. (NASDAQ: WBA).
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While the valuation is at the high end of the company’s historical range in recent years, Credit Suisse believes that its low margins and M&A potential support a multiple at least at this level. The firm’s new EPS estimates are $0.25 (previously $0.45) for fiscal 2016 and $0.29 (previously $0.59) for fiscal 2017.
This company was only about a $1 stock in 2012, but since that time it has reached as high as the $9 mark. Even after exponential gains, Rite Aid is still a fraction of its glory days from the 1990s. This trend has been primarily driven by steadily increasing revenue over the years. Not to mention, Rite Aid received an absolutely huge tax break at the end of its 2015 fiscal year.
Shares of Rite Aid were up 2.3% at $8.85 in Thursday morning trading. The stock has a consensus analyst price target of $10.00 and a 52-week trading range of $4.42 to $9.07.
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