Rite Aid Outperform Reinstated At Credit Suisse, Firm Notes 'High M&A Potential'

In a report published Thursday, Credit Suisse analyst Edward J. Kelly reinstated coverage of Rite Aid Corporation RAD with an Outperform rating and a price target of $10. The analyst believes that the stock offers a compelling risk/reward profile. "The company has made good progress on its turnaround and we expect further improvement as management pushes forward with numerous, traffic-focused initiatives. The recent acquisition of EnvisionRx only enhances the company's outlook," the Credit Suisse report said. Apart from the positive fundamental outlook, the stock also has another "realistic" avenue for upside through M&A. The analyst believes that the industry is poised for further consolidation and Rite Aid is likely to be an attractive acquisition target. The company has been able to increase its EBITDA over 50 percent over the last four years, driven by industry tailwinds, missteps by competitors and improvements in internal execution. The analyst believes that Rite Aid might be able to sustain average organic EBITDA growth in the mid single digit range over the next few years. "We expect RAD's turnaround to continue at a steady pace, as its remodel initiative (only 36 percent complete), the new generic procurement deal with MCK, further loyalty/wellness enhancements, and another round of generic launches more than offset sustained reimbursement rate pressure," Kelly stated. In addition, the analyst believes that being acquired would make strategic sense for Rite Aid currently, since a deal would help add significant scale at retail, enabling the company to better manage reimbursement rate pressure, and would unlock significant cost synergies. The deal also offers considerable revenue synergies given the performance gap between the two players," Kelly added.