The following excerpts explain why Zacks senior consumer products analyst Steven Ralston, CFA remains neutral on Rite Aid Corporation (RAD), the retail drug store chain and advises investors to Hold the shares:
"Management at the Rite Aid Corporation is executing a turnaround strategy centered on increasing the profitability of the existing store base, which includes improving the product mix with generic and private label products. Nevertheless, management acquired the Brooks Eckerd chain prior to a convincing turnaround in profitability. In addition, the acquisition will be dilutive in fiscal 2008. Thus we are maintaining our Hold recommendation.
"Due to the company being in a turnaround phase with a high debt burden, the determination of Rite Aid's stock valuation is challenging. Moreover, Rite Aid competes with Walgreens (WAG) and CVS (CVS), both of which are expanding rapidly. In addition, both companies have higher margins than Rite Aid due to structural cost advantages, including purchasing power to obtain lower cost merchandise and significantly less interest expense.
"In addition, Wal-Mart's (WMT) entry into the retail generic drug market may prove detrimental to the company's pharmacy sales. Given Rite Aid's structural competitive disadvantages and high debt position, the stock should be valued on a price-to-sales basis. To further illustrate the point, in 2001 concern over the debt load caused Rite Aid's stock to trade down to 0.085x sales, an order of magnitude below its competitors.
"However, if the turnaround plan and the integration of the Brooks Eckerd drug stores are successful, the upside is significant. Until there is strong evidence of sales improvement, the tentative target price is $4.00 based on a 0.125 price-to-sales ratio (based on expected post-merger annualized sales)."
Read the full analyst report on RAD.
Read the full analyst report on WAG.
Read the full analyst report on CVS.
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