During each company’s last quarter, they all saw margin improvements due to new generic introductions. In the pharmacy business, this has been the greatest known catalyst, as generic drug companies pay pharmacies more to use generics versus name brand drugs.
During the most recent quarter, Walgreen Company (NYSE:WAG) saw its operating margins increase 0.5% year-over-year, while CVS Caremark Corporation (NYSE:CVS) increased 1% year-over-year. Therefore, both companies saw strong gains in margins, and expect further long-term expansion. But these gains were nothing compared to Rite Aid.
In Rite Aid’s most recent quarter, it saw operating margins of 1.5%, compared to an operating loss of 1.3% in the year prior. This shows a significant industry leading level of improvement for Rite Aid, but because its margins are so much lower than its competitors, it still has the room to improve for many years to come.
With that said, generic introductions will continue to be introduced for the next several years. Thus, margin improvements will also continue. With Rite Aid Corporation (NYSE:RAD) having just a fraction of the margins as its competitors; room to improve – and the deepest discount to sales – I think a long-term hold could also be very rewarding; as another way to play the stock.
Final thoughts
Right now, shares of Rite Aid Corporation (NYSE:RAD) are trading at $2.75, and already I received countless tweets and emails asking if I thought the stock had bottomed. Unfortunately, I don’t know the answer to such a question, but I do believe that it is possible that we see a period of consolidation and slower gains throughout the second half of this year; due to lower profits in upcoming quarters.
If you have a short-term time horizon, then you might want to consider taking profits into the second half of the year. However, you must keep in mind that there is still unprecedented value in this stock, and the market could very well look past short-term weakness and see the bigger picture. Personally, I have already bought back the 5,000 shares I sold, and I am in this for the long-haul; because the chance of getting left behind is far greater than that of seeing large losses.
The article After a 6-Month 200% Gain, Here Are Two Ways You Can Play This Stock originally appeared on Fool.com and is written by Brian Nichols.
Brian Nichols is long RAD. The Motley Fool has no position in any of the stocks mentioned. Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
