Rite Aid An Outperform, Has 13% Upside

Credit Suisse’s Robert Willoughby assumed coverage of Rite Aid Corporation RAD with an Outperform rating and a price target of $9, stating that there is an 85 percent chance of the company’s acquisition by Walgreens Boots Alliance Inc WBA being approved.

Analyst Robert Willoughby mentioned that Rite Aid’s shares are trading at a valuation that reflects the likelihood of its acquisition by Walgreens Boots and the deal’s FTC clearance. Rite Aid’s shares are currently trading at a 13 percent absolute discount to the deal terms.

FTC Scrutiny

While the Boards of both companies support the deal, the FTC has sought additional information. Walgreens Boots has indicated its willingness to divest 1,000 of Rite Aid’s 4,600 stores to appease the FTC. Willoughby expects the company to renegotiate rather than abandon the merger agreement in case the FTC seeks deeper cuts.

Rite Aid Implementing Refurbishment Program

Rite Aid is taking steps to emerge out of an operational abyss attributable to the ill-conceived acquisition strategy of the company’s prior management. The company is implementing a refurbishment program aimed at enhancing its same store sales metrics.

“The refurb program will continue, and with store openings forecast to eventually turn profitable, we expect revenue and earnings growth to accelerate,” Willoughby wrote.

“The acquisition of EnvisionRx in 2015 added faster-growing PBM and specialty pharmacy businesses that have exceeded our growth forecasts,” the Credit Suisse report stated.