Will Rite Aid Double In 2013?

With shares of Rite Aid Corporation (NYSE:RAD) trading at around $1.43, is RAD an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Rite Aid recently reported its first profit in 22 quarters. That’s a dismal record, but investors love turnaround stories with a lot of upside potential. Rite Aid certainly has a lot of upside potential, but we need to make sure investors aren’t getting too carried away.

A profitable quarter was a great sign. Raised guidance and the expectation of profitability in 2013 was an even better sign. Rite Aid also showed good management by making the difficult to decision to close unprofitable stores. It’s tough calls like these that can fuel a good turnaround story. The short position on Rite Aid has been high for years. It’s still at 4.80 percent, but it has been decreasing. This is yet another good sign. Shorts are getting nervous, which is good news for longs.

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Many people who are negative on Rite Aid look at it more as a convenience store than anything else, but 68 percent of sales come from prescription drugs. All other sales are gravy. This has been a bad flu season, which has drawn more people to Rite Aid for prescriptions and other remedies. While at the store, many shoppers also purchase snacks, reading material, and other miscellaneous items. However, flu season won’t act as a catalyst forever. Trading on that news is strictly a momentum play.

Let’s take a look at some important numbers so we can get a better idea of the big picture for Rite Aid.

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Rite Aid was nearly impossible to find, which is never a good sign. Actually, it wasn’t even found. The latest debt-to-equity ratio for Rite Aid was from October 2012, and it wasn’t a good number. Whenever you see N/A for debt-to-equity, it’s bad news. The balance sheet for Rite Aid is dreadful, but the direction is more important, and Rite Aid is heading in the right direction.

Debt-To-Equity

Cash

Long-Term Debt

RAD

5.71 (10/12)

$263.64 Million

$6.15 Billion

WAG

0.35

$1.83 Billion

$5.07 Billion

CVS

0.27

$1.24 Billion

$10.04 Billion

 

T = Technicals on the Stock Chart Are Strong

Rite Aid has been on fire this month, and it doesn’t show any signs of slowing down. It’s very rare that Rite Aid outperforms Walgreen Co. (NYSE:WAG) and CVS Caremark Corporation (NYSE:CVS), but that is the case for the past month. Over the past three years, Rite Aid has underperformed both competitors.

1 Month

Year-To-Date

1 Year

3 Year

RAD

39.32%

5.51%

11.24%

-5.59%

WAG

6.45%

5.73%

23.48%

13.02%

CVS

5.10%

7.03%

24.55%

58.50%

 

At $1.43, Rite Aid is currently trading above all its averages.

50-Day SMA

1.14

100-Day SMA

1.17

200-Day SMA

1.27

 

E = Earnings and Revenue Have Been Inconsistent

Annual revenue hasn’t been impressive, but it hasn’t been terrible, either. It has remained steady without showing much growth. Earnings also haven’t been impressive, but there has been a healthier range over the past three years.

2008

2009

2010

2011

2012

Revenue ($)in billions

24.33

26.29

25.67

25.21

26.12

Diluted EPS ($)

-1.54

-3.49

-0.59

-0.64

-0.43

 

When we look at last quarter on a YoY basis, we see a decrease in revenue, but an increase in earnings. As mentioned earlier, it’s the first profitable quarter in the past 22 attempts.

11/2011

2/2012

5/2012

8/2012

11/2012

Revenue ($)in billions

6.31

7.15

6.47

6.23

6.24

Diluted EPS ($)

-0.06

-0.19

-0.03

-0.05

0.07

 

T = Trends Might Support the Industry

Flu season will improve sales for a few months. However, this is temporary.

At one time, it had been feared that Wal-Mart (NYSE:WMT) would take significant market share away from traditional drug stores. While this battle is far from over, that fear seems to have been exaggerated. This is a positive for the industry.

Conclusion

Rite Aid’s margins and cash flow are weak, and debt is a problem, but the right steps are being taken to turn this story around. It’s not likely that the stock will double in 2013, especially with the debt ceiling being a bigger threat than the fiscal cliff. Remember what happened to the market in the summer of 2011. If a debt ceiling solution isn’t found, then markets will tank, taking Rite Aid with it. The good news is that we don’t have to worry about this for another month. Therefore, Rite is currently an OUTPERFORM. If you’re looking for a long-term investment, then it would be wise to wait until mid-March. If the debt ceiling isn’t worked out, then you might have an opportunity to buy Rite Aid at a better price.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.