The moment Rite Aid (NYSE: RAD) canceled its merger deal with Albertsons citing shareholder unrest, analysts issued bearish reports on the company.
Does trouble loom for the firm as it continues on its own?
RBC Capital set a $1.00 - $1.25 price target on Rite Aid, while Evercore ISI called the company in a “lose, lose” scenario. Rite Aid faces competition from the likes of Walgreens (NASDAQ: WBA) and even Amazon.com (NASDAQ: AMZN).
The latter is entering the pharmacy business and establish an online presence. Yet the combined RAD – Albertsons firm would have faced two-fold more competition. The drug store and supermarket are both low-margin businesses. Albertsons’ Safeway is already ineffective against Walmart (NYSE: WMT) and Kroger’s (NYSE: KR).
Although RAD lowered its outlook, forecasting EBITDA of $540 - $590 million, down from $615 - $675 million, the future cash flow value. According to simplywall.st, the stock is worth $4.28. To get that value, the company must grow earnings annually by 34 percent. Its revenue growth lags the U.S. market average at 2.3%, compared to the market’s 6.3% average.
Shareholders may need new fresh management because the current one is specialized in selling the company. Once the Walgreen's deal broke down, management went with Albertson's. Now it must re-look at operations at the individual store level. And it must find a way to cut costs and boost traffic.
At $1.50 a share, speculators may bet management change is next and new leadership will drive earnings higher.
