Rite Aid Corporation (RAD): Growth at a Reasonable Price, or Takeover Target?

Walgreen and CVS trade relatively in line on a number of fronts, but Walgreen pays a 3% dividend yield, compared to CVS at 1.9%. They trade in line on a P/S, P/E, operating margins and debt load basis. Stacking Rite Aid up against these two major pharma companies allows us to see it at a much greater discount – 0.1x sales and 4x cash flow – compared to its major peers – 0.5x sales and 10x cash flow.

Various cost-cutting initiatives and debt refinancing efforts should also give Rite Aid investors reasons to be cheery. Same-store sales have generally improved, though that metric declined in the latest quarter as a heavier-than-usual introduction of generic drugs hurt the industry in general.

Last but certainly not least, Cardinal Health, Inc. (NYSE:CAH) is one of the top healthcare service companies, and also distributes branded and generic pharmaceuticals, in addition to over the counter products. Cardinal trades on the cheap end of the industry at 0.1x sales and 10x cash flow. We remain cautious about this cheap valuation, however, given the company’s low 5-year expected earnings growth rate of 8%, and 2% operating margin. Cardinal was one of Jim Simons newest picks last quarter (check out Jim Simons’ top picks).

To recap: Rite Aid went relatively unnoticed until last week, but cost-cutting endeavors and attempts to lower debt make it a solid turnaround play going forward. With its strong generic segment, Rite Aid is expected to continue to grow nicely and also is an appealing takeover target. We like Rite Aid not only for its growth opportunities, but also its takeover potential.

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