Anytime a well known company's stock goes up nearly 300% in a year, you begin to wonder why. That is exactly what Rite Aid Corp's stock has been doing this year. It started at just under a buck fifty and now is trading at $5.40 as of last Friday. If you had just let your gains run, you would've made out with 3X what you put in the beginning of the year. So, why is this stock going bonkers? As always let us explore this from both a fundamental and technical basis.
Rite Aid is in the retail drugstore business and is the third largest behind Walgreens (WAG) and CVS Caremark (CVS). Since 2008, Rite Aid has come a long way in finally churning a profit in FY 2012 of $118M from a loss of $2.9B in FY 2008.
In recent years, Rite Aid's gross profit has been positively impacted by generic introductions, which have higher gross profits than brand counterparts. Once the life of a brand-name drug expires (usually after 10-15 years) a generic drug can be made. It essentially has the same active ingredients as the brand-name drug, but the generic drug may differ in color, shape, taste, packaging, preservatives, and inactive ingredients. Furthermore, Rite Aid's wellness + loyalty program has positively increased sales.
Comparing Q2 2013 to Q1 2103, the balance sheet has remained largely unchanged with about $7.2M and 7.1M in total assets respectively. Similarly, liabilities were about $9.5M in both periods.
However when you look at Q2 2013 versus Q2 2012 income statement, you can see that RAD was profitable with a calculated basic and diluted income (loss) per share of $0.03 versus -$0.05 in the comparable prior period. This was primarily due to increased revenues on lower costs.
Per the Q2 2013 10Q, operating results were primarily driven by high gross profits from generic drugs, lower selling, general and administrative expenses (SG&A), the settlement of a prescription drug antitrust matter (+$23.5M) and lower interest expense, partially offset by continued reimbursement rate pressures and a higher loss on debt retirement.
It is important to note that the one time prescription drug antitrust matter increased their basic and diluted income per share by $0.02. Therefore, you can almost say their EPS was $0.01 for the period. Still the company was profitable and beat the same period last year.
From a technical perspective, there was a clear earnings breakout and gap up run. This is also what we've seen as a result of recent earnings release by both Facebook and Google. In all three cases, we have not yet seen gap fills. Buying on that gap up has proven to be a good strategy.
Right now the stock is setting up for a breakout or a breakdown. Though the odds favor a breakout. Also you can see that the RSI (relative strength index) is not overbought and has some room to run upwards.
What goes higher keeps going higher. This seems to be the theme for 2013 and we should just follow it until it doesn't work anymore.
Disclaimer: This article is written for informational purposes only and isn't intended as investment advice. Disclosure: I do not have a position in RAD.
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