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Rite Aid (RAD) is a buy at current levels, having triggered a Relative Strength Buy signal in Chaikin Analytics after pulling back to strong support at the $7.40 level from its recent peak of $8.48. The stock rallied last week to a high of $8.35 and closed Friday at $8.05 up 6.8% on the week. There was heavy call option buying on Monday and Tuesday, along with takeover chatter on the major news networks.
On Thursday March 12, Stefano Pessina, the CEO who engineered the merger of Walgreens (WBA) with Alliance Boots to create a giant global pharmacy company, said that their next big acquisition would probably be in the U.S.
Walgreen’s smaller U.S. rival, Rite Aid would be a particularly appealing takeover target and one that Walgreens has expressed interest in buying in the past. With a market capitalization of over $90 billion, Walgreens could easily justify paying a 50+% premium for RAD, which has over $26 billion in revenue but a market cap of only $7.44 billion.
Building on Rite Aid’s recent profit margin improvements, Walgreens could pay a premium for RAD’s stock and still add to bottom line earnings.
Rite Aid is a large retail drugstore chain in the U.S. operating in the major metropolitan areas, and also operates in the pharmacy benefit management area. RAD had a huge run from the time its Chaikin Power Gauge stock rating turned bullish in December of 2012 at $1.02 until its June 2014 high of $8.61. The stock then took a steep drop to an October 2014 low of $4.42, with the Power Gauge turning bearish briefly in late July.
Rite Aid’s stock suffered because of inventory and supply chain problems related to its new partnership with McKesson (MCK) and the slower pace of generic drug introductions which produce higher profit margins for RAD. Both of these problems have abated as new generic drug introductions have picked up and the McKesson issues have been resolved.
The Chaikin Power Gauge stock rating turned bullish again on RAD in mid-December when they reported better than expected earnings, and the stock started outperforming the market shortly thereafter. The company got another boost in February when they announced the acquisition of benefits manager EnvisionRX.
Evercore ISI analyst Ross Muken reiterated his buy recommendation on RAD at that time and raised his price target to 9.50 from $8.50. The company reported a 3.3% increase in February same store sales on top of a hefty 4.8% increase in January same store sales, which makes it all the more attractive to an acquirer like Walgreens.
Rite Aid has a bullish Chaikin Power Gauge rating and is in the very strong Food/Drug-Retail/Wholesale industry group. The bullish Power Gauge rating has been driven by recent positive earnings surprises and its strong performance relative to the market and its industry group.
Plus:
Chaikin Analytics stock research
Chaikin Power Gauge stock rating model
NASDAQ Chaikin Power Stock Indexes
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
