Rite Aid Corporation (RAD), Walgreen Company (WAG), CVS Caremark Corporation (CVS): Will This Pharmacy Company be Acquired, and Is It Needed?

However, these Walgreen and CVS Caremark Corporation (NYSE:CVS) strengths have little impact on the future of Rite Aid’s stock. The reason is that Rite Aid is now profitable, as last year was its first full year of profitability in more than half a decade.

In the first two quarters of 2013, Rite Aid’s profit is nearly double 2012’s full-year profit , and what’s impressive is that new generic introductions are only going to help improve margins . As a result, Rite Aid’s price to sales ratio comes into play, because I would challenge that Rite Aid could double in price without seeing any revenue growth, and without being acquired.

Valuation equals upside
The reason Rite Aid could double without any revenue growth is that it trades at just 0.13 times sales. In comparison, CVS and Walgreen trade at 0.59 and 0.67 times sales, respectively. Granted, both Walgreen Company (NYSE:WAG) and CVS Caremark Corporation (NYSE:CVS) are more efficient companies, but as Rite Aid’s margins improve and it pays its debts, it becomes more deserving of the premium that has been awarded to its industry peers.

Thus, if Rite Aid trades at 0.3 times sales and continues to restructure its business and profit from new generic introductions, its stock would be more than double its current price. Moreover, at 0.3 times sales, Rite Aid Corporation (NYSE:RAD) would STILL trade at a 50% discount to its peers! As a result, I hardly believe that an acquisition is necessary as the next catalyst for Rite Aid.

However, because of Rite Aid’s valuation relative to its peers, I think it is clear to see why both Walgreen and CVS might bid to acquire Rite Aid. Either way, it’s setting up to be an interesting and potentially lucrative year(s) ahead.

The article Will This Pharmacy Company be Acquired, and Is It Needed? originally appeared on Fool.com and is written by Brian Nichols.

Brian Nichols is long Rite Aid. The Motley Fool has no position in any of the stocks mentioned.

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