Rite Aid Corporation (NYSE:RAD) shares are down more than -78.64% this year and recently increased 0.85% or $0.01 to settle at $1.77. Walgreens Boots Alliance, Inc. (NASDAQ:WBA), on the other hand, is down -15.20% year to date as of 12/05/2017. It currently trades at $70.66 and has returned -2.85% during the past week.
Rite Aid Corporation (NYSE:RAD) and Walgreens Boots Alliance, Inc. (NASDAQ:WBA) are the two most active stocks in the Drug Stores industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Comparatively, WBA is expected to grow at a 15.40% annual rate. All else equal, WBA’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 6.09% for Walgreens Boots Alliance, Inc. (WBA). RAD’s ROI is 5.40% while WBA has a ROI of 11.90%. The interpretation is that WBA’s business generates a higher return on investment than RAD’s.
If there’s one thing investors care more about than earnings, it’s cash flow. RAD’s free cash flow (“FCF”) per share for the trailing twelve months was +0.14. Comparatively, WBA’s free cash flow per share was +1.02. On a percent-of-sales basis, RAD’s free cash flow was 0.45% while WBA converted 0.85% of its revenues into cash flow. This means that, for a given level of sales, WBA is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. RAD has a current ratio of 1.70 compared to 1.10 for WBA. This means that RAD can more easily cover its most immediate liabilities over the next twelve months. RAD’s debt-to-equity ratio is 9.74 versus a D/E of 0.47 for WBA. RAD is therefore the more solvent of the two companies, and has lower financial risk.
RAD trades at a forward P/E of 32.00, a P/B of 2.51, and a P/S of 0.06, compared to a forward P/E of 11.56, a P/B of 2.70, and a P/S of 0.59 for WBA. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. RAD is currently priced at a -18.81% to its one-year price target of 2.18. Comparatively, WBA is -18.08% relative to its price target of 86.25. This suggests that RAD is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.90 for RAD and 2.20 for WBA, which implies that analysts are more bullish on the outlook for RAD.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. RAD has a beta of 1.77 and WBA’s beta is 1.20. WBA’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. RAD has a short ratio of 5.95 compared to a short interest of 2.99 for WBA. This implies that the market is currently less bearish on the outlook for WBA.
Walgreens Boots Alliance, Inc. (NASDAQ:WBA) beats Rite Aid Corporation (NYSE:RAD) on a total of 10 of the 14 factors compared between the two stocks. WBA higher liquidity, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. Finally, WBA has better sentiment signals based on short interest.