Susquehanna Recommends Buying Rite Aid (RAD) After 2-Years of Being Handcuffed

(Updated - September 22, 2017 1:15 PM EDT)

Susquehanna's event-driven/special situations analyst Joe Stauff is recommending buying Rite Aid (NYSE: RAD) in a note to clients this morning. Stauff said after 2-years of being handcuffed amid the pending Walgreen's deal they see margin opportunity and financial flexibility.

Stauff listed several reasons he is bullish on the beaten-up stock:

(1) a good business (key attribute of drugstore is consistent traffic due to inelastic demand for Rx's),

(2) a company that suffered operationally from the "atrophy" imposed on it from the restrictions of being a "target" during that past 2-year M&A review process, and

(3) a near-term event in October to "release" a VERY high-quality management from its previous restrictions with RELEVANT tools it acquired as part of its amended deal with WBA.

Stauff argues that the risk/reward at current levels makes the stock an "actionable buy" today, especially amid the very low expectations.

The analyst sees ~$200m of EBITDA upside for fiscal year ending 3/2/19. This equates to $1.60/share on a $2.42 stock.

The analyst sees "durable and significant" tools the company has to re-build the atrophy over the past two years. These include:

• the ability to purchase generic drugs at levels Walgreen's pays with the new 10-year Rx supply agreement signed with Walgreen's
• The sale to Walgreen's at ~13x LTM EBITDA delivers RAD to ~4.5x by Mid-2018, creating accretive refinancing activity and sable financial runway
• some notable benefits as RAD's highly credible management re-engages with network partners to again grow its pro-forma network
• operational and financial stability provides RAD multiple options including buying Fred's (NASDAQ: FRED) or introducing a buyback program.

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