Why Rite Aid Is the Wrong Play

By Glenn Curtis  SEP 25, 2009 9:45 AM

Unimpressive second-quarter -- especially compared to Walgreen's profits.

 


Did this week go super slow or was it just me? I can’t wait till the close. Tonight my wife is renting a movie, and we’ll be enjoying a quiet night at home.

Asian stocks took a hit overnight. The Hang Seng was off 0.13% and the Nikkei was down 2.64%. European stocks, however, were mixed earlier this morning. And here in the US, we’re currently trading lower.

Here’s what I’m focused on (other than the approaching weekend):

Rite Aid (RAD):
I continue to pay attention to the large drugstore chain for a couple of reasons. First, I always like to think it might give me some insight into how some of the other big chains (ala Walgreen (WAG) and CVS (CVS)) are doing. Second, I believe in the old investor theory that says our aging population will lead to increased demand for medicines and other health-related items. So I’m hoping the company can right this ship

That said, I should point out that the company’s second-quarter results left me rather unimpressed.

1. In the period, the Street was looking for a $0.16 loss and the company lost $0.14. It's just hard to get excited about this, given the profits Walgreen has and is expected to turn in.

2. The downbeat outlook it offered up for fiscal 2010 didn’t do much for me, either.

3. With the losses expected this year and next, what’s in it for me if I get involved now?

Research In Motion (RIMM):
Did you see the "CrackBerry" company’s second-quarter numbers that came out after the close last night?

Excluding items, it put up $1.03, whereas the Street had been looking for a buck. However, the talk this morning is likely going to be about two things: First, it missed on the top line, and second, for the third quarter, it indicated in the release it’s looking for $3.6 to $3.85 billion on the top line. The issue there is that the Street is at $3.9 billion.

Meanwhile, on the bottom line, it's looking for $1 to $1.08. And that’s fairly underwhelming because the estimate is $1.04.

Some other thoughts:

1. Admittedly, the expectations bar was set pretty high, given the beats it turned in both in the fourth quarter of last year and the first quarter of this year. However, the shares do deserve a backhanded slap. I’m concerned that some of the excitement and cult-like mentality that’s been surrounding the stock could peter off.

2.
The shares trade at about 20.1 times this year’s estimate of $4.13, which is just too much. I’m not saying its definitely going to get down to this level, but I'd be more interested in the high $60s or low $70s. Again, I think there will be a pullback early in the session.

Minyan Justin points out in Upgrades & Downgrades: Red Ink for Research in Motion? that Deutsche downgraded the company.
Procter & Gamble (PG):
Jeffries slapped a Buy rating on the company.

My thoughts:

1. Cliché or not, people will continue to buy diapers for the little rugrats that run through them like hotcakes, as well as paper towels to clean up their frequent spills.

2. It's not insanely cheap at 14.02 times the fiscal 2010 estimate, but I’d still consider dipping my big toe in the pool because it has good potential for growth looking out over the next decade. More recently, the earnings estimate for the present year has picked up, which is interesting, too.

3. This isn't an explosive situation, but the shares have the potential to be a steady performer in the coming years.

Carnival
(CCL):
Nomura slapped a Buy rating on the cruise line.

1. This is a good move. In the next year or two, I believe this stock is really going to rock as people spend more on travel, gambling, booze, and all the other stuff that goes part and parcel with riding on one of its Fun Ships.

2. As I've mentioned before, Cuba is the big wild card in the industry right now. If the country ever opens its doors to Americans, demand for travel could really get a big goose or a positive kick in the pants.

Have a great day and an even better weekend!
No positions in stocks mentioned.

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