Rite Aid Continues Slide After Evercore Reinstates Underperform Rating

Shares of Rite Aid (RAD) fell in Friday trading, adding to Thursday’s sharp losses after an analyst from Evercore ISI reinstated coverage on the stock with an Underperform rating. The news follows yesterday’s announcements that the drugstore chain and Walgreens Boots Alliance (WBA) had terminated their prior merger agreement and that Walgreens will acquire 2,186 stores, related distribution assets, and inventory from Rite Aid for an all-cash purchase price of $5.175B.

EVERCORE REINSTATES UNDERPERFORM: Evercore ISI analyst Ross Muken reinstated coverage on Rite Aid with an Underperform rating, versus its previous rating of In-Line, to reflect threats from online competition, structural challenges at the back-end of pharmacy given network positioning, and limited strategic options. The analyst said that while the asset sale to Walgreens aids in deleveraging and likely keeps liquidity concerns at bay for the time being, his firm still sees a challenging environment ahead for the company. Muken noted that Rite Aid’s fundamentals “continue to deteriorate” and that he sees downside to the stock near-term to $2.00-$2.50 per share, or 8-9 times forward

EBITDA. COWEN BACKS OUTPERFORM: On the other side, Cowen analyst Charles Ryhee said his firm is positive on the new Rite Aid pact with Walgreens, saying it better positions the company than if it had remained stand-alone with no deal at all. The analyst maintained an Outperform rating on the stock, saying that he sees several benefits from the transaction, including deleverage, lower generic procurement costs, greater leverage toward PBM, and increased financial flexibility. Ryhee noted, however, his disappointment that the merger with Walgreens was terminated, as he was hopeful that the deal would ultimately gain approval and close, but reiterated that he is positive about the new asset sale agreement. PRICE ACTION: In the early afternoon, shares of Rite Aid are down 4.67% to $2.76.

OTHERS TO WATCH: Walgreens Boots Alliance (WBA) shares are down over 1% to $77.45 in midday trading, while Fred’s (FRED), whose related asset purchase agreement with Rite Aid was also terminated Thursday, fell about 3.3% to $9.20.