Rite Aid (NYSE: RAD) Stock is a Value Buy at These Levels

Drugstore operator Rite Aid Corporation NYSE: RADstock got pummeled with the announcement of Amazon Pharmacy NASDAQ: AMZN rollout, dropping (-17%) in the following days. Shares are underperforming the benchmark S&P 500 index NYSEARCA: SPY and presenting a value buy for prudent investors. Rite Aid is an essential business making it a pandemic benefactor at the peak of the COVID-19 surge. As vaccines near FDA approval, money is trying to shift into value plays but stifled by second and third surges of COVID spread. Rite Aid serves as both a pandemic and value play as the nation’s third-largest drugstore chain that got discounted severely on the Amazon news. Prudent investors can watch for opportunistic pullback levels to gain exposure during this overreaction.

Q2 FY 2020 Earnings Release

On Sept. 24, 2020, Rite Aid released its fiscal second-quarter 2020 results for the quarter ending August 2020. The Company reported an earnings-per-share (EPS) profit of $0.25 excluding non-recurring items versus consensus analyst estimates for a profit of $0.14, an $0.11 beat. Revenues grew 11.5% year-over-year (YoY) to $5.8 billion, beating analyst estimates for $5.74 billion. Retail pharmacy revenues grew 4.4% YoY as same-store-sales (SSS) grew 3.5% YoY. This consisted of front-end sales of 4.6% YoY growth and pharmacy sales of 2.3%. Retail pharmacy accounted for $4 billion of total revenues. The Elixir pharmacy services segment saw 29% YoY revenues increase by $459 million to $2 billion. The Company ended the quarter with $1.35 billion in liquidity.

Conference Call Takeaways

Rite Aid CEO, Heyward Donigan, reiterated the RxEvolution turnaround strategy to become a “dominant mid-market PBM, unlocking the value of pharmacists and revitalizing our retail and digital experiences.” COVID-19 triggered a surge in top and bottom line growth as an essential business. The Company has upgraded 200 stores and plans to continuing renovating stores to be “rebranded” with the new logo. Media campaigns are launching in the Fall and Winter for the “Stores of the Future” targeting new growth consumers, “meeting the needs of millennial and Gen X women between the ages of 25 and 49, who care for multi-generational households, including children, parents and pets.” The Company gained pharmacy market share in customers under the age of 55, by expanding Medication Therapy Management and expanding home delivery. The rebranding turnaround efforts are hitting on all cylinders.

Low-Ball FY 2021 EPS Guidance Drop

Rite Aid provided full-year 2021 EPS guidance between (-$0.67) to $0.09 versus $0.58 consensus analyst estimates. Full-year revenues are forecast between $23.5 to $24 billion versus $23.47 billion analyst estimates with SSS expected between 3% to 4% growth YoY. The Company attributes continued pressure on reimbursement rates and a less severe cold and flu season. This could be an overly cautious low balling of estimates even after considering the PTO one-time benefit seen in the previous quarter.  

Could Amazon Pressure Consolidation?

On Nov. 17, 2020, Amazon unveiled its entrance into the pharmacy market with its Amazon Pharmacy store. It enables Prime members to receive unlimited free 2-day delivery. Prime members can also receive deep discounts when paying without insurance of up to 80% on generics and 40% off brand name medications. Prime members can also use these discounts across 50,000 participating pharmacies in the U.S. This announcement crushed the major drugstores including Walgreen Boots Alliance NYSE: WBA and CVS Health NYSE: CVS in addition to Rite Aid along with pharmacy benefits managers (PBMs) Cardinal Health NYSE: CAH, McKesson NYSE: MCK and Amerisource Bergen NYSE: ABC. The most damage hit the shares of GoodRx NASDAQ: GDRX as the discounting mechanism plays right into the Company’s core business model of leveraging its members for medication discounts. This could pressure more consolidation in the industry making the third-largest drugstore chain, Rite Aid, a prospective acquisition candidate again. Keep in mind Walgreens and Rite Aid was originally slated to merge in 2015 until antitrust concerns collapse the deal in 2017. The entry of Amazon could arguably justify another acquisition or merger attempt by a larger player in addition to margin pressures for PBMs. Rite Aid shares have a 29% short interest, making this one susceptible to explosive short squeezes. Management may have low-balled estimate ranges out of an abundance of caution. Prudent investors may look for opportunistic pullbacks heading into the Q3 2020 earnings due out in December.

 RAD Opportunistic Pullback Levels

Using the rifle charts on the weekly and daily time frames enables a precise view of the playing field. The weekly rifle chart is in a make or break formation with a rising 5-period moving average (MA) at $10.47 versus the 15-period MA near the $11.61 Fibonacci (fib) level. The monthly rifle chart triggered a market structure low (MSL) above $9.96 and the weekly rifle chart triggered a MSL above $10.64.  The daily stochastic is still in an oscillation down under the daily 15-period MA as it hovers near the $10.75 overlapping fib with the potential for a deeper oscillation down. This can provide opportunistic pullback levels at the $10.64 weekly MSL, $9.96 fib, $9.58 fib and the $8.43 fib. The upside trajectories range from the $12.52 fib up to the $16.07 fib based on a potential short-squeeze on improved FY 2021 guidance and or renewed acquisition speculation.