Deutsche Bank Stops Short On Rite Aid: Downgrades To Hold

Rite Aid Corporation RAD reported its F4Q results largely in line with expectations, although the top line missed the estimate.

Deutsche Bank’s George Hill downgraded the rating on the company from Buy to Hold, with a price target of $9.

F4Q Results

Rite Aid reported its EBITDA marginally ahead of the estimate, driven by both segments coming in largely in line with expectations.

The company’s EPS was one cent ahead of the estimate, “which we note is only a beat by $6 million and was helped by tax,” Hill mentioned.

The RAD/WBA Deal

Hill believes that the FTC is unlikely to block the deal with Walgreens Boots Alliance Inc WBA, although “recent government initiatives to block mergers” negatively skewed the probability.

Related Link: Rite Aid's Q4 Sales Surge 24%, Bottom Line Beats

With only about 11 percent upside remaining to the deal offer price, and potential for a significant decline in Rite Aid’s share price if the deal falls through, Hill believes that “investors should look for better opportunities.”

Unappealing Risk/Reward

Hill also stated that Rite Aid’s current share price and options suggest a 77 percent probability of the Walgreens deal closing successfully.

Although the deal is expected to close before the end of 2016, “the implied RAD share price should the deal break is $5.22, down ~36 percent from recent trading,” the analyst cautioned.

The FY17 revenue, gross margin, adjusted EBITDA margin and EPS estimates have been lowered on expectations of a challenging reimbursement environment.