Rite Aid Corp (RADCQ)

[Theo]

More Analysts Defend Rite Aid, Shares Keep Falling

By Teresa Rivas

Rite Aid (RAD) stocks was tumbling on Thursday following disappointing second-quarter earnings and guidance.

The Roanoke Times/Associated Press

Mizohu was defending the shares yesterday, and now two more analysts are out Friday saying that the selloff is overdone.

UBS’s Steven Valiquette maintained a Buy rating and $10 price target, writing that the stock’s reaction following the conference call was “unjustified”:

In our view, there was essentially no new incrementally negative commentary on the conf call to warrant the selloff in shares of RAD today. The company generally dismissed any incremental reimbursement pressure concerns related to datapoints from Wal-Mart (WMT) and a few other retailers recently, and reiterated that benefits from the revised McKesson agreement should continue to lower drug purchasing costs. On a related topic, RAD inferred that there could be a benefit from the recent reversal of generic inflation trends, but this conveyed in the context of the RAD’s overall expectation that drug purchasing costs should still trend lower in F2H16 (driven by other factors as well).

He also thinks there was some good news for investors:

One of the key positives from the earnings call was the disclosure of 700k net new lives in the 2016 PBM selling season, which should contribute over $700 mil in revs in 2016. On an annual PBM rev base of ~$5 bil, this implies mid-teens growth from this alone. If we further assume some modest growth in the base book of PBM business (despite slightly fewer Part D regions in CY16 vs. CY15), and continued strong growth in the specialty pharmacy subsegment (which should get a lift from PCSK9 inhibitors, as confirmed by mgmt.), it seems logical that the newly acquired EnvisionRx PBM could generate 20% organic growth in 2016.

JPMorgan’s Lisa Gill also reiterated an Overweight rating and $10 price target on the stock, calling the “sharp selloff” an “overreaction”:

We were surprised at the magnitude of the sell-off (shares were down 10.8% vs. a 0.3% decline in the S&P 500), and we believe this was an overreaction, as the midpoint of the adjusted EBITDA guidance remained intact. Our positive thesis on RAD continues to be based on company-specific tailwinds, including the benefit from ongoing initiatives to drive sales and operating efficiencies, the McKesson agreement and the EnvisionRx acquisition, combined with broader industry tailwinds, such Rx utilization and an improving generics pipeline.

S&P Capital IQ’s Joseph Agnese reiterated a Buy rating, although he lowered his price target by $1 to $9:

Lower drug reimbursement levels pressured margins more than we expected. However, we still view the company as well positioned to benefit from continued improvement in its store base, the integration of Envision Pharmaceutical Services (acquired in June), and favorable industry trends.

Nonetheless, Rite Aid shares were 0.1% lower to $7.66 in recent trading.