How Rite Aid Could Handily Beat Earnings Expectations

Chris Lange

Rite Aid Corp. (NYSE: RAD) is scheduled to report its fiscal first-quarter financial results before the markets open Thursday morning. The consensus estimates from Thomson Reuters call for $0.03 in earnings per share (EPS) on $6.65 billion in revenue. In the same period of last year, the specialty retailer reported EPS of $0.04and revenue of $6.47 billion.

This company has analysts all over Wall Street jumping on board. Rite Aid is one of the nation’s leading drugstore chains, with nearly 4,600 stores in 31 states and the District of Columbia. Many on Wall Street see the company very favorably positioned in health care, given its geographic overlap with Medicaid expansion, as well as its push into clinics.

Many analysts also feel that current underlying fundamentals remain very strong and that management’s 2016 guidance likely will prove conservative, with upside from the deal with McKesson and perhaps an earlier than expected close of the EnvisionRx acquisition.

The analysts at UBS think the company could blow past earnings expectations when it reports. They feel that overall consensus guidance of EBITDA of $279 million is way too low. In comparison, the UBS team has an EBITDA estimate much higher at $309 million. They cite a very difficult fiscal first quarter last year and see none of the circumstances that were in play then affecting the company now. The transition to McKesson also weighed down the quarter last year.

On the other side of the coin, Rite Aid reported muted same-store sales for the month of May.

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Credit Suisse reinstated coverage of Rite Aid with an Outperform rating and a $10 price target, as the firm believes that the stock provides one of the more compelling risk-reward profiles in its space.

While the valuation is at the high end of the company’s historical range in recent years, Credit Suisse believes that its low margins and M&A potential support a multiple at least at this level. Credit Suisse’s new EPS estimates are $0.25 (previously $0.45) for fiscal 2016 and $0.29 (previously $0.59) for fiscal 2017.

This company was only about a $1 stock in 2012, but since that time it has reached as high as the $9 mark. Even after exponential gains, Rite Aid is still a fraction of its glory days from the 1990s. This trend has been primarily driven by steadily increasing revenue over the years. Not to mention, Rite Aid received an absolutely huge tax break at the end of its 2015 fiscal year.

For the May 29 settlement date, Rite Aid saw its short interest rise to 32.2 million shares with 1.5 days to cover. This was up from the previous level of 28.7 million shares with 2.0 days to cover. The May 15 reading was the lowest level on the year.

Midday Wednesday, shares of Rite Aid were down 0.9% to $8.87. The stock has a consensus analyst price target of $10.00 and a 52-week trading range of $4.42 to $9.07.

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