This Struggling Pharmacy Ended 2012 On a High Note

By Eric Novinson - January 2, 2013 | Tickers: CVS, RAD, WMT, WAG | 0 Comments

Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.

Rite Aid (NYSE: RAD) investors finally got their turnaround signal, as generic drug sales and efficiency gains helped return the pharmacy chain to profitability last quarter. A profitable Rite Aid poses a bigger challenge for CVS (NYSE: CVS) and Walgreens (NYSE: WAG) as well, and these competitors can also benefit from a major trend that helped Rite Aid during the quarter. Rite Aid has three main arguments in its favor right now.

Valuation

Rite Aid looks very cheap for a major, national drugstore chain. The pharmacy traded below $1 a share several times in 2012. On Dec. 19, 2012, before its earnings release, the pharmacy's shares traded at $1.04. The earnings release the next day started an uptrend in Rite Aid's shares, and Rite Aid held on to most of its gains, closing at $1.36 on Dec. 31, 2012.

Because of Rite Aid's past losses, forecasts based on the drugstore's prior earnings history might not account for its current potential. Going by the price to sales metric, Rite Aid only costs about a tenth of what its competitors cost right now. Rite Aid currently has a P/S of 0.05, while CVS has a 0.5 P/S and Walgreens has a 0.49 P/S. As a big box chain that also operates pharmacies, Wal-Mart (NYSE: WMT)also offers a valid comparison here, and Wal-Marts 0.49 P/S comes out very similar to Walgreens' and CVS' figures. Rite Aid does need to maintain its margins to qualify as a true bargain.

Margins

Rite Aid now has a positive profit margin, at least in the short term. During the past three years, Rite Aid brought in over $6 billion in revenue each quarter, so the drugstore didn't achieve profitability because of a temporary sales spike. Rite Aid's revenue actually fell by 1.2% last quarter, although this decline may mean better margins for the pharmacy. An Associated Press article explained that pharmacy patients switched to generic drugs, boosting Rite Aid's profits but reducing the drugstore's overall sales somewhat.

Higher generic drug sales provide a reason to invest in any pharmacy, not just Rite Aid, because CVS, Walgreens, and Wal-Mart can also achieve higher profit margins by selling generic drugs. The generics trend also has implications for every pharmacy's future earnings releases, as well as discounters and grocery stores with major pharmacy operations. A weaker quarterly revenue figure for any pharmacy might not necessarily mean a miss on earnings going forward. Higher generic drug sales could have bigger effects on Rite Aid's financial figures because of the chain's weak past performance, though.

Competition

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This Struggling Pharmacy Ended 2012 On a High Note