Are Rite Aid's Rally Days Now Over?
Rite Aid investors were totally shocked on Thursday when the stock declined 10% after earnings. By all measures, Rite Aid released yet another phenomenal quarterly report, thus showing the progress that's been made in such a short period of time. Yet given the loss, investors now have to wonder if Rite Aid's rally days are over and if they should turn their attention to Walgreen or CVS Caremark instead?
Rite Aid announced earnings at 7 a.m., and almost immediately the stock fell 5%. At that time, the only fundamentals known or processed were top- and bottom-line results, both of which were solid beats, thus leaving investors to wonder why Rite Aid was falling so sharply.
This question becomes even more difficult to answer when you dig into the quarter. Rite Aid hit a home run on every single metric possible. The company beat estimates, posted same-store-sales growth of 2.3%, pharmacy sales rose 3.5%, and script same-store sales even rose 0.7%.
All of these additional metrics of improvement were not present late last year or earlier this year, back when Rite Aid's uptrend first began. Therefore, the only way to logically explain Thursday's action is to say that expectations were just a little too high.
Are the rally days over?
The problem with the "increased price equals higher expectations" theory is that Rite Aid is still very cheap.
When we look at the two larger pharmacies, Walgreen and CVS Caremark, we'll see two companies growing same-store sales, growing revenue, and improving profits, much like Rite Aid. Granted, Walgreen and CVS Caremark are performing better.
Walgreen reported earnings on Friday, the day after Rite Aid, and its total revenue rose 5.9%, driven by strong growth of 7.3% in prescription sales. And while Rite Aid has somewhat struggled in its front-end store business, Walgreen's retail segment grew 2.4%.
CVS Caremark has yet to report earnings, but the company did give an update on Dec. 18. CVS Caremark boosted its dividend by 22% -- now paying a yield of 2% -- and also announced plans to buy back approximately $6 billion in stock. Moreover, in November when CVS Caremark reported earnings, the company saw its total revenue rise 5.8%, pharmacy revenue rose 7.8%, and its retail business saw a 5% jump.
If we look at Rite Aid's quarter, it is not seeing pharmacy growth of 8%, revenue rise 5%, and it's surely not paying a dividend or buying back stock. Therefore, CVS Caremark and Walgreen are in fact the better businesses, but the key is that they should be.
Both CVS Caremark and Walgreen are expected to grow total sales by more than 5% in 2014; Rite Aid is guiding for growth of about 0.5%. However, Rite Aid has not soared 300% in the last year because of its revenue growth. Instead, it has been due to margin improvements and the company's remarkable progress from losing $368 million in 2012 to posting net income of more than $300 million during the last four quarters.
Yet, despite Rite Aid's fundamental progress and valuation gains, the stock trades at just 0.2 times sales while both Walgreen and CVS Caremark trade at 0.7 times sales. Therefore, the question of whether or not Rite Aid still has more upside potential, or if the stock's rally days are over, depends on if investors believe a one-third premium to its peers is an appropriate valuation for the stock.
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The article Are Rite Aid's Rally Days Now Over? originally appeared on Fool.com.Brian Nichols is long Rite Aid. The Motley Fool has no position in any of the stocks mentioned. 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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