Yet another threat is Wal-Mart Stores, Inc. (NYSE:WMT). The cost of generic drugs for Wal-Mart is lower than all the aforementioned companies because it has lower-cost manufactures overseas. This allows Wal-Mart to sell generic drugs for a lower price, which in turn has the potential to drive more consumers to its pharmacy and increase its market share. For those of you interested in the Wal-Mart play (rarely a bad idea), it currently yields 2.50%.
Though Wal-Mart is a growing presence in the space, it’s not a serious threat to Rite Aid, Walgreen, or CVS at the moment. This really comes down to Rite Aid Corporation (NYSE:RAD) versus direct peers. Considering Rite Aid has lower margins, more debt, and doesn’t offer any yield, Walgreen and CVS are better long-term investments.
As mentioned earlier, Rite Aid has the most upside potential because of where it’s coming from, but it also carries the highest risk – by a landslide. Despite Rite Aid Corporation (NYSE:RAD) refinancing $500 million of high-interest debt, its debt situation still isn’t pretty. If Rite Aid remains highly leveraged and the market heads south, then the stock is likely to be hit hard.
The market doesn’t care about cost-cutting measures when the tide heads out. The rise of generics might have the potential to offset this headwind by fueling growth, but why take that chance? Walgreen and CVS are much safer investments in any economic environment.
Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Is Rite Aid’s Rally Sustainable? originally appeared on Fool.com.
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