Rite Aid Corp. (NYSE: RAD) remains one of the most important and visible long-term turnaround stories for the investment community. The problem right now is that its second-quarter earnings report just gutted the company. Wall Street’s reaction was so negative that shares were down more than 10% after the earnings report, and they went even under the rock-bottom panic selling prices during that brief period in August.

It is not unusual for investors to sell off stocks that have had big recovery bounces when they do not like the news they see. That being said, it is also not unusual for analysts to come out defending their bullish views when such negative reactions are seen. The analyst team at Bank of America Merrill Lynch has issued a strong defense for Rite Aid shares after the report.

Rite Aid shares closed down 10.8% at $7.66 on Thursday, and the 85 million shares traded at the closing bell were more than four times normal trading volume. With such a negative reaction, what exactly is it that Merrill Lynch sees for staying so positive here?

For starters, they maintained their Buy rating and also maintained their $11.00 price objective. The firm’s call signaled that EBITDA was above plan, that there is now balance sheet clarity and that the pharmacy benefit manager (PBM) contributions beat expectations.

Rite Aid’s adjusted EBITDA of $347 million was above Merrill Lynch’s $329 million view on a stronger PBM sales contribution and lower administrative spending. Factors below the line were said to take off two cents from earnings per share, leading the earnings miss. The firm also boosted its adjusted EBITDA target for the year to reflect the beat, but lowered the 2015 earnings per share to $0.17 from $0.20 on higher depreciation and amortization charges.

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The 17% growth in revenues was above Merrill Lynch’s 15% expectation, and PBM came in at $1.1 billion, versus its $896 million expected, and retail at $6.647 billion also slightly beat its $6.602 billion expectation. The stronger PBM volume also gives positive hope for the expectations out to 2017, with higher asset efficiency driving cash flow and return on capital.

One note of caution was that the gross margin was below plan on the higher PBM contribution, plus ongoing pharmacy reimbursement pressure, offset in part by a stronger generic contribution that diluted pharmacy revenue growth.

Rite Aid was shown to have consumed $26 million in cash. After the Envision deal, its net debt rose to $7.3 billion. Merrill Lynch’s report said:

The second quarter results are largely consistent with our positive thesis. Rite Aid is posting modestly better top line growth as it invests in store refurbishings and acquisitions, with EBITDA dollars increasing ahead of plan. The Envision deal masked efforts to improve the balance sheet, but working capital improvement and deleveraging efforts should be more apparent in future quarters, which should help the return on invested capital profile. We reiterate our Buy rating with a view that the equity will appreciate as it works down its debt burden and capital costs.

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A consideration here is that this is not the first earnings disappointment. Rite Aid shares are up massively, after having been under $1.00 in late 2012. At $7.66, Rite Aid shares have a consensus analyst price target of $10.05 and a 52-week trading range of $4.42 to $9.47. Merrill Lynch’s $11.00 price objective is $1.00 shy of the street-high analyst target, and this implies upside of more than 40% ahead, if the analysts are correct on their targets.

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