Is Rite Aid ($RAD) Stock Undervalued?

Figure 1. Rite Aid Corporation stock value over the last year. Source: Google Finance

It is no surprise why Rite Aid Corporation stock values have been plummeting over the last year. They’ve had a rough few years, with store closures and decreased revenue-per-store figures. Of course it would be amiss to not factor in the rumors that Amazon ($AMZN) has been hoping to enter the pharmaceutical retail game.

The problem is, people were wondering if Rite Aid was undervalued even 2 years ago with the Walgreen buyout rumors, and they were sitting at roughly $6/share. So if this stock becomes delisted in the next year, I look like quite the fool.

I am not going to go into analysis to argue whether or not Rite Aid is financially healthy. I am not going to project how they will do facing competition in the next 5 years.

I seek to approach my thinking just as how someone would in a fire sale. If Rite Aid was gutted and sold (barring any anti-trust interference from the government) piece by piece, would it be worth more than it is selling now?

Walgreens purchased 2186 stores from Rite Aid for $5.18 billion this year, leaving Rite Aid with some of their better-performing stores. The cash will reportedly be used to pay down debt, meaning Rite Aid will decrease their interest payments and can theoretically hobble along for the next few years.

As of this writing, price per share closed at $1.78/share, setting market cap at $1.89 billion. The deal leaves Rite Aid with around 2414 stores.

The purchase price from Walgreens was at a mean valuation of $2.36 million per store. Roughly applying this, the remaining stores at that valuation is 5.7 billion, much higher than the current market cap.

Now of course there are holes in this. First of all valuation does not work linearly this way; secondly their assets can easily depreciate; thirdly the anti-trust argument can hinder any sell-off dreams; and fourthly, even by Walgreen’s valuation, $RAD has been trading much lower than that.(Appoximately 2 billion lower than that calculation)

But I think this is a good medium-term play. The company is healthy enough for the next year that they will not face delisting any time soon. Once the sell-off ends, even if it settles into $2.50/share, you’ve made a healthy 40% gain. I wouldn’t hold this any longer than a year.

It’s a risky play because I hate investing into traditional brick-and-mortars, but it’s worth considering.

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