Looking For Signs Of Life In Rite Aid Shares After Walgreens' Deal Disappointment

2017 continues to be a challenge for Rite Aid Corporation RAD from a fundamental point of view, especially at the pharmacy retail segment, Loop Capital Markets' Andrew Wolf commented in an initiation note. Although the company is now positioned for a turnaround in the second quarter now is not necessarily the time to be aggressive on the stock.

Wolf initiates coverage of Ride Aid's stock with a Hold rating and $2.50 price target as the pharmacy retailer doesn't offer investors any near-term earnings visibility so the stock will likely trade flat over the next six to 12 months.

Rite Aid's revised deal to sell many of its stores to industry giant Walgreens Boots Alliance Inc WBA does make Rite Aid a smaller and less leveraged company, the analyst noted. It is also a "financially stronger" entity with lower exposure to pharmacy reimbursement rate pressures in retail and superior exposure to the growing pharmacy services segment.

The strategic rationale behind the deal is that Rite Aid will boast a higher percentage of EBITDA contribution from its PBM and EnvisionRx businesses which carry a better growth profile than the retail business, the analyst also noted. Specifically, EnvisionRx could account for 28 percent of adjusted EBITDA after the deal with Walgreens closes, which would be up from 19 percent in the first quarter of 2017.

Bottom line, investors should consider the deal with Walgreens as a "re-launch" of the company's turnaround efforts but the company needs to show improvements before investors can become aggressive.

At time of publication, shares of Rite Aid were down 4.42 percent at $2.38. Walgreens shares were up 1.26 percent at $83.32.

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