Where Will Rite Aid Corporation Be in 5 Years?

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Buying and holding Rite Aid Corporation (NYSE: RAD) stock has turned out to be an excruciatingly painful experience. For every $5 you might have invested in the stock at the beginning of 2017, you'd now only have around $1. Ouch.

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The biggest factor behind Rite Aid stock's collapse, of course, was the doomed acquisition attempt by Walgreens Boots Alliance (NASDAQ: WBA). After more than a year of drama with the Federal Trade Commission, Walgreens threw in the towel on trying to buy Rite Aid outright. Instead, the giant pharmacy retailer opted to only buy part of Rite Aid -- 1,932 stores plus three distribution centers. 

Rite Aid will emerge from the sale of those stores much smaller, but with lower debt thanks to the nearly $4.4 billion Walgreens is paying. Will buying and holding Rite Aid stock be more enjoyable in the future? It depends. Here are several scenarios for where Rite Aid will be five years from now.

The good 

There are actually two potentially good scenarios for investors in how things might unfold for Rite Aid. I have stated in the past that Rite Aid could be a gold mine for value investors if one of two things happens: The company returns to profitability and growth or it gets bought out.

How could Rite Aid return to profitability and growth? The Walgreens deal could help. As I mentioned earlier, Rite Aid's debt will be significantly lower with the cash it receives from selling a large chunk of its stores. That means less money spent on interest. The stores that Rite Aid is keeping are more profitable on average than the stores that it's divesting. Also, Rite Aid gets to use Walgreens' network for buying generic drugs for 10 years. This should lower Rite Aid's costs.

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Could Rite Aid still be bought out? Absolutely. Rite Aid's current market cap of around $1.7 billion prices its remaining stores at a big discount, in my view. Also, recall that the company paid $1.8 billion plus stock for pharmacy benefits manager (PBM) Envision Rx in 2015. Envision Rx's revenue is now roughly 50% higher than it was two years ago. There's a strong case to be made that Rite Aid is dirt cheap at its current share price. 

The bad 

I suspect that there are also at least two bad scenarios for investors with respect to where Rite Aid might be in five years. One is that the company muddles along on its own in kind of a pharmacy purgatory, with flat or minimal growth. This would be just enough to keep the company from disappearing, but not enough for the stock to perform well.

Another bad scenario for investors buying Rite Aid stock right now would be if the stock continues to sink for several more years, then an acquisition happens with the price paid for the buyout matching the current stock price. Rite Aid itself would be part of another company five years from now just as in one of the "good" scenarios, but current investors wouldn't be better off.

And the ugly 

Then there's the ugly scenario. In this version of the future, Rite Aid struggles for a while to compete against larger rivals like Walgreens. It doesn't have enough money to keep up with competitors in renovating its stores and adding more options. 

In this scenario, Amazon.com (NASDAQ: AMZN) enters the retail pharmacy market with full force. The internet retail giant captures a significant market share, negatively impacting all of the top U.S. pharmacy chains but hurting Rite Aid the most. Potential acquirers, worried about the threat from Amazon, stay away from Rite Aid.

The company continues to lose money and ultimately goes into bankruptcy. Investors are left with only pennies on the dollar from their initial positions in the stock. Rite Aid disappears, along with most of investors' money.

My prediction

Any of these scenarios are possible, but some are more probable than others. I don't think the doomsday scenario will happen. My reasoning is that Rite Aid stock would become so cheap in that scenario that some company would step in and make an acquisition.

In my view, an acquisition of Rite Aid sometime over the next five years is the most likely outcome for the company. It wouldn't be surprising for a private equity firm to buy Rite Aid at a nice premium to its current valuation with an end goal of selling it later, either in whole or in part, at an even higher price. 

The question, in my mind, is when an acquisition might happen. And the timing of a potential deal and how Rite Aid performs in the meantime significantly impact whether the scenario is closer to the good one or the bad one described earlier. My best guess is that the dust will need to settle from Walgreens' purchase of the Rite Aid 1,932 stores before anything happens on the acquisition front. Potential acquirers might want to see how Rite Aid fares in its new reality for a while.

I could be totally wrong, of course. One of the other scenarios could unfold. Something totally out of the blue could happen. However, my hunch is that Rite Aid won't exist as a stand-alone entity five years from now and will instead be part of another company. But I think current investors will probably be happier with this outcome than they are now.

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