Charles Dickens wasn't thinking about pharmacy stocks when he
wrote the famous words, "It was the best of times, it was the
worst of times." Nevertheless, the phrase lends itself well to
The pharmacy retailer's stock is up more than 20% so far this
year. That's definitely a good times story. On the other hand,
Rite Aid shares have fallen over 20% in the past three months.
With this significant pullback, is now the time to buy Rite
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It would be easy to view Rite Aid as overpriced even with the
stock's plunge over the past few months. On a trailing-12 month
basis, the company's price-to-earnings ratio of 27 ranks
significantly higher than that of larger rivals
, which have P/E multiples of 20 and 22, respectively. If we only
looked at the past year, Rite Aid is relatively expensive
compared to its peers and to the overall market.
Looking to the future gives a different perspective, however.
Thomson Reuters assigns Rite Aid a forward P/E multiple of 13.5.
That figure looks attractive stacked up against CVS Caremark's
forward P/E of 15.6 and Walgreen's forward multiple of 17.
Of course, CVS Caremark and Walgreen both merit some premium
valuation over Rite Aid because of their dividends and larger
footprints. CVS' dividend yield currently stands at 1.4%.
Walgreen's dividend yield of 1.7% is even more appealing. And
consider the scale advantages with size -- Rite Aid had 4,581
drugstores at the end of its most recent quarter, compared to
Walgreen's 8,217 and CVS' 7,705. And then there's the issue of
historical profitability -- the fiscal year ending in
March, 2013, was Rite Aid's first to turn a profit since 2006
(CVS and Walgreen remained profitable for the duration). Even
with these disadvantages factored in, though, I think Rite Aid's
valuation compares favorably with its peers.
Business > numbers
I wouldn't recommend buying Rite Aid (or any other stock, for
that matter) simply because valuation multiples look better than
those of other stocks in the industry. That's especially true for
forward-based metrics, which usually involve some guesswork from
analysts. Instead, look at the business fundamentals that are
driving the numbers.
In Rite Aid's case, there are several positives that point to
a brighter future. Like CVS Caremark and Walgreen, Rite Aid's
profits closely correlate to how much money the company makes
from generic drugs -- and
signed an agreement with Rite Aid earlier this year to
supply generic drugs, a deal that's expected to save Rite Aid
some serious cash. This deal hasn't produced the expected savings
yet, but it should begin to help the bottom line within a few
All of the big pharmacy retailers should also benefit from
higher numbers of insured Americans. Rite Aid's CEO John Standley
noted in June that the company was already experiencing strong
prescription growth in states that have expanded Medicaid as a
result of the Affordable Care Act.
Perhaps the most encouraging growth opportunity for Rite Aid
is its remodeling of stores with its Wellness model. These
Wellness stores will help the company to offer more healthcare
services, including medical clinics and the Health Alliance
program for patients with chronic conditions. As of June, around
29% of Rite Aid's stores had been remodeled. These stores boast
higher front-end sales and prescriptions filled than the
company's other stores. So as more stores are remodeled, this
should boost Rite Aid's financial results.
Right time for Rite Aid
I like the long-term prospects for Rite Aid. The fundamentals
are in place for solid performance over the years to come. My
hunch is that the projected growth numbers for the company aren't
too far off, and that Rite Aid's shares have plenty of room to
That's not to say that the stock can't go lower. It could. An
overall market correction or disappointing earnings could take a
toll. Given a long enough horizon, however, Rite Aid should do
well. Given Rite Aid's opportunities, the pullback might be an
opportunity to get a great company at a great price.
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Is It Time to Buy Rite Aid Corporation Stock?
originally appeared on Fool.com.
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