Finance

Dissecting the Numbers for Rite Aid Corporation (RAD) and Celgene Corporation (CELG)

Rite Aid Corporation (NYSE:RAD) shares are down more than -13.20% this year and recently increased 1.79% or $0.03 to settle at $1.71. Celgene Corporation (NASDAQ:CELG), on the other hand, is down -13.24% year to date as of 04/16/2018. It currently trades at $90.54 and has returned 4.14% during the past week.

Rite Aid Corporation (NYSE:RAD) and Celgene Corporation (NASDAQ:CELG) 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.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect RAD to grow earnings at a -3.69% annual rate over the next 5 years. Comparatively, CELG is expected to grow at a 19.65% annual rate. All else equal, CELG’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 42.66% for Celgene Corporation (CELG). RAD’s ROI is 11.10% while CELG has a ROI of 29.40%. The interpretation is that CELG’s business generates a higher return on investment than RAD’s.

Cash Flow



The value of a stock is simply the present value of its future free cash flows. RAD’s free cash flow (“FCF”) per share for the trailing twelve months was +0.04. Comparatively, CELG’s free cash flow per share was +2.05. On a percent-of-sales basis, RAD’s free cash flow was 0.13% while CELG converted 11.86% of its revenues into cash flow. This means that, for a given level of sales, CELG is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. RAD has a current ratio of 0.90 compared to 5.00 for CELG. This means that CELG 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 1.24 for CELG. RAD is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

RAD trades at a forward P/E of 16.76, a P/B of 2.16, and a P/S of 0.07, compared to a forward P/E of 8.90, a P/B of 10.12, and a P/S of 5.26 for CELG. 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 -16.18% to its one-year price target of 2.04. Comparatively, CELG is -21.69% relative to its price target of 115.62. This suggests that CELG is the better investment over the next year.

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 1.71 and CELG’s beta is 1.49. CELG’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. RAD has a short ratio of 6.89 compared to a short interest of 1.97 for CELG. This implies that the market is currently less bearish on the outlook for CELG.

Summary

Celgene Corporation (NASDAQ:CELG) beats Rite Aid Corporation (NYSE:RAD) on a total of 12 of the 14 factors compared between the two stocks. CELG , is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. CELG is more undervalued relative to its price target. Finally, CELG has better sentiment signals based on short interest.

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