Is This Really the Best Pharmacy Stock?

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There may be stormy weather ahead for the market. A long weekend didn't give investors much of a vacation, as ADP's employment numbers on Thursday presaged a worse report from the Bureau of Labor Statistics. In wobbly times like these, it becomes even more important to do some homework on the companies you own or have your eye on. Those that can outperform in the future often leave a trail of positive signals in the past. With that in mind, let's take a look at Rite Aid (NYS: RAD) to find out if it fits the bill for future success.

Where's the beef?
Despite a lack of profit, Rite Aid's done very well for investors over the past year, offering far better performance than peers CVS Caremark (NYS: CVS) and Walgreen (NYS: WAG) despite a lack of profitability. Is there something behind the negative P/E that drove its gain? Let's take a look:

Metric

Trailing 12-Month (or most recent) Result

Annual revenue$25.43 billion
Annual net income($413 million)
Profit margin(1.6%)
Annual free cash flow($56 million)
Market cap$1.6 billion
Price-to-earnings ratioNM
12-month stock price growth64.8%
Cash$148 million
Debt$6.17 billion
Total stores4,714

Sources: Yahoo! Finance, Morningstar, Google Finance, and corporate 10-K filings.
NM = Not meaningful due to negative earnings.


Sailing a red-ink sea
The first thing that jumps out is that Rite Aid isn't profitable, yet the stock's gained more than both CVS and Walgreen, both of which manage to be profitable. Both have dividends as well. So what's driving this discrepancy? Free cash flow almost crossed into positive territory over the past twelve months, and has been positive recently. Could that be behind this momentum?

RAD Free Cash Flow TTM Chart

RAD Free Cash Flow TTM data by YCharts

It strikes me as strange, when looking at this chart, that Rite Aid would be the stock to soar when CVS has clearly enjoyed greater gains in free cash flow. But isn't it possible that improvements to the bottom line (though not enough to enter positive territory) could be behind this?

RAD Net Income TTM Chart

RAD Net Income TTM data by YCharts

Apparently not. Where's the beef? The stock saw some love on Valentine 's Day for publicizing a plan to retire some debt. That doesn't mean it's trending profitably, only that it's chipping away at a mountain of debt. The company's streak of unprofitability stretches back for years. Again, where's the beef? I thought for a moment that buyout rumors might be driving the gain, but those rumors only emerged after Walgreen ended its pharmacy relationship with Express Scripts (NAS: ESRX) .

Looking elsewhere
Investors may have woken up to Rite Aid's riskiness of late, as the stock's declined almost 16% since mid-March. Buyout speculation may provide another push forward, but it's hard to see that as a sustainable trend when acquiring a red-inked competitor helps Walgreen overcome its bad breakup. I'd suggest investors enjoy their recent gains and look elsewhere -- and I'll be supporting that call with a long-term underperform pick in The Motley Fool's CAPS.

Investors looking for a medication-dispensing retailer with positive momentum may wish to look closer at CVS, which is up 28% in the past year and has been profitable for years. Another option might be Costco (NAS: COST) , purveyor of everything from prescriptions to potstickers. That company's stock has kept pace with (or bested) CVS' for some time:

Annualized Growth Rate

CVS

Costco

1-year24.9%17.4%
3-year16.2%24.5%
5-year6.2%9.1%
10-year11.1%12.9%

Sources: Yahoo! Finance and BMWMethod.

Foolish final thoughts
Rite Aid's been up and down quite a few times over the past decade, but it's spent a lot more time in the market's doghouse than it has in investors' good graces. It's always great to catch a ride on a momentum stock, but it's also important to remember that momentum without meaning always fizzles out. That looks like what's happening with Rite Aid now.

If you're still on the hunt for some big gains, The Motley Fool's got you covered with a brand-new free report on a rule-breaking multibagger that's changing the game in medicine. Our subscribers have seen gains that put Rite Aid's to shame, but there's plenty more room for growth ahead. Don't miss your chance to get a piece of this great stock -- click here to get your free information now.

At the time this article was published Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services have recommended buying shares of Costco Wholesale and Express Scripts Holding. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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