Rite Aid Corporation (NYSE:RAD) shares are up more than 4.06% this year and recently increased 0.49% or $0.01 to settle at $2.05. Walgreens Boots Alliance, Inc. (NASDAQ:WBA), on the other hand, is down -5.69% year to date as of 02/14/2018. It currently trades at $68.49 and has returned -4.25% during the past week.
Rite Aid Corporation (NYSE:RAD) and Walgreens Boots Alliance, Inc. (NASDAQ:WBA) are the two most active stocks in the market based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect RAD to grow earnings at a -3.69% annual rate over the next 5 years. Comparatively, WBA is expected to grow at a 12.33% 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 11.10% while WBA has a ROI of 11.90%. The interpretation is that WBA’s business generates a higher return on investment than RAD’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. 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
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. RAD has a current ratio of 0.90 compared to 1.00 for WBA. This means that WBA can more easily cover its most immediate liabilities over the next twelve months. RAD’s debt-to-equity ratio is 3.68 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 73.21, a P/B of 2.59, and a P/S of 0.09, compared to a forward P/E of 10.77, a P/B of 2.66, and a P/S of 0.56 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
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. RAD is currently priced at a -0.97% to its one-year price target of 2.07. Comparatively, WBA is -20.48% relative to its price target of 86.13. 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 3.00 for RAD and 2.20 for WBA, which implies that analysts are more bullish on the outlook for RAD.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. RAD has a beta of 1.62 and WBA’s beta is 1.16. WBA’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.RAD has a short ratio of 5.76 compared to a short interest of 3.57 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, higher liquidity and has lower financial risk. WBA is more undervalued relative to its price target. Finally, WBA has better sentiment signals based on short interest.