Rite Aid Prospects For 2015

December 21, 2014 0 Comments

It’s no secret that I’m bullish on Rite Aid. I’ve mentioned as much in earlier blog post. Despite the fact that Rite Aid refused to support technology that I like and wants to prevent me from using Apple Pay, the company is a very smart investment (in terms of growth, anyway). In mid-2013, the stock was trading under $1 dollar per share. Now the stock has grown 6 times that amount a year later. What was once a company believed to be on the brink of bankruptcy has now overcome their obstacles to become highly profitable, paying off debt and renovating their stores.

The stock fell last summer, due to falling EBITDA and profit margins that failed to impress. However, recently the stock experienced a big rally due to larger than expected annualized revenue growth and net income growth of $104,846 thousand in November 2014. A strong Q3 prompted the company to raise its full year’s guidance next year. Revenue for 2015 is expected to fall between $25.26 billion and $25.4 billion with net income between $315 million and $370 million (or $0.31 – $0.37 EPS). All things considering, with a strong third quarter report with higher margins, script sales and net income growth, we can expect Rite Aid to regain its $8 target sometime in the future, perhaps reaching beyond that.

While Rite Aids profit margin is growing steadily, it’s growing at the cost of servicing its debt. Interest expenses fell from $102.3 million to $97.4 million, which is a good start, however, Rite Aid needs to ensure investors that they are getting serious about lowering its debt obligations. Liquidity declined in by $184 million YoY because Rite Aid borrowed money from its revolving credit facility to repay the $270 million on its senior secure notes.

The company took a $0.02 per diluted earnings per share loss for the current quarter, so it is indeed paying its debt back. This could strengthen the company within the long-term, at the expense of short-term earnings. This could potentially lower growth expectations of $8 dollars a share. Either way, Rite Aid is still a buying opportunity because earnings growth will be much larger once interest expenses have declined. 

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