Rite Aid Corporation (NYSE:RAD) shares are up more than 18.78% this year and recently increased 9.35% or $0.2 to settle at $2.34. Walgreens Boots Alliance, Inc. (NASDAQ:WBA), on the other hand, is up 3.80% year to date as of 01/10/2018. It currently trades at $75.38 and has returned 5.28% 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. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Comparatively, WBA is expected to grow at a 11.26% annual rate. All else equal, WBA’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 5.76% 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 +0.10. Comparatively, WBA’s free cash flow per share was +0.17. On a percent-of-sales basis, RAD’s free cash flow was 0.32% while WBA converted 0.14% of its revenues into cash flow. This means that, for a given level of sales, RAD is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. RAD has a current ratio of 1.70 compared to 1.00 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 0.54 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 68.82, a P/B of 3.34, and a P/S of 0.10, compared to a forward P/E of 12.25, a P/B of 2.93, and a P/S of 0.61 for WBA. RAD is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. RAD is currently priced at a 13.04% to its one-year price target of 2.07. Comparatively, WBA is -12.22% relative to its price target of 85.87. This suggests that WBA 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
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. RAD has a beta of 1.73 and WBA’s beta is 1.19. 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 6.31 compared to a short interest of 3.09 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 11 of the 14 factors compared between the two stocks. WBA has a higher cash conversion rate, is more profitable, generates a higher return on investment, has higher cash flow per share and has lower financial risk. In terms of valuation, WBA is the cheaper of the two stocks on an earnings and book value, WBA is more undervalued relative to its price target. Finally, WBA has better sentiment signals based on short interest.