1-Star Stocks Poised to Plunge: Rite Aid?

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Based on the aggregated intelligence of 180,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, retail drugstore operator Rite Aid (NYS: RAD) has received the dreaded one-star ranking.

With that in mind, let's take a closer look at Rite Aid's business and see what CAPS investors are saying about the stock right now.

Rite Aidfacts

Headquarters (Founded)Camp Hill, Pa. (1927)
Market Cap$1.4 billion
IndustryDrug retail
Trailing-12-Month Revenue$25.4 billion
ManagementCEO John Standley
CFO Frank Vitrano
Return on Capital (Average, Past 3 Years)3.2%
Cash/Debt$148.5 million / $6.3 billion
CompetitorsCVS Caremark
Walgreen
Wal-Mart Stores

Sources: S&P Capital IQ and Motley Fool CAPS.

On CAPS, 48% of the 282 members who have rated Rite Aid believe the stock will underperform the S&P 500 going forward.

Just last month, one of those bears, njf735, quoted Rite Aid's own annual report as a clear sign of how dangerous its debt load is:

"Among other things, our indebtedness will: 

• limit our flexibility in planning for, or reacting to, changes in the markets in which we compete;
• place us at a competitive disadvantage relative to our competitors with less indebtedness;
• render us more vulnerable to general adverse economic, regulatory and industry conditions; and
• require us to dedicate a substantial portion of our cash flow to service our debt."

Interest coverage = 0.2x
Quick ratio = 0.4x

Operating income hardly exceeds interest payments. How do you compete against [Walgreen] and CVS when you are barely scraping by after servicing debt?

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At the time this article was published Fool contributor Brian Pacampara owns no position in any of the companies mentioned. The Motley Fool owns shares of Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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