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RAD vs. WBA Which is a Better Stock Ahead of Earnings?

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On Jun 26, General Electric Company (GE - Free Report) left the blue-chip index, Dow 30 after 111 years. The industrial giant will be replaced with Walgreens Boots Alliance, Inc. (WBA - Free Report) . This new member of the Dow is already in the news after it acquired at least 1,900 stores of Rite Aid Corporation (RAD - Free Report) . Additionally, around two-thirds of existing Rite Aid chain will undergo full store rebranding by the end of 2020.

Meanwhile, the healthcare sector has jumped 3.2% in the last three months, becoming one of the best performing sectors among the S&P 500. Signs of the sector’s well-being became more evident in the past three months when the NYSE ARCA Pharmaceutical Index and the Nasdaq Biotechnology Index have gained 1.3% and 4.4%, respectively.

Both Rite Aid and Walgreens Boots Alliance are scheduled to report earnings results on Jun 27 and Jun 28, respectively. In this respect, it may be a good time to figure out which of these is a better stock. Both pharmaceutical retailers carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other major earnings scheduled on Jun 28 include NIKE, Inc. (NKE - Free Report) and Achillion Pharmaceuticals, Inc. (ACHN - Free Report) .

Price Performance

Rite Aid has witnessed a decline of 50.1% over the past year, while Walgreens Boots Alliance has fallen 13.6%. Meanwhile, the broader industry has slumped 13.9% during the same period. Both pharmaceutical retailers have registered a decline, but Walgreens Boots Alliance is in a better position with respect to rival Rite Aid. 

Dividend Yield

In a year’s time, Rite Aid and Walgreens Boots Alliance have offered dividend yields of 0% and 2.4%, respectively, while the industry’s dividend yield is 2.4%. So Walgreens Boots Alliance clearly wins this round.

Net Margin

The pharmaceutical industry enjoys higher profit margins than several other sectors. This is possibly one of the reasons why critics of the sector continuously draw attention to allegedly exorbitant drug pricing, which helps the sector maintain its steep margins.

Rite Aid has registered a net loss margin of -0.36%. With a net margin value of 4.71%, Walgreens Boots Alliance performs better than rival Rite Aid as well as the broader industry, which has a net margin value of 3.66%.

Debt-to-Equity Ratio

The debt-to-equity (D/E) ratio is a good indicator of the financial health of a company and is a good proxy for its debt-servicing capacity. In the context of a capital-intensive industry like pharma, this is an indicator of a company’s long-term sustainability.

Rite Aid’s debt-to-equity ratio of 209.92% is significantly high compared with the industry’s D/E ratio of 119.95%.  With a comparatively lower D/E ratio of 44.47%, Walgreens Boots evidently has a better leverage condition.

Valuation

The most appropriate ratio to evaluate these two drug makers is perhaps EV/EBITDA. This metric is usually used to compare two stocks in the same industry. It is superior to other metrics such as P/E because it is not affected by the different capital structures of the two companies.

Coming to the two pharma retailers, Walgreens Boots with an EV/EBITDA ratio of 8.35 is overvalued than the broader industry, which has an EV/EBITDA value of 7.87. On the other hand, with an EV/EBITDA ratio of 4.56, Rite Aid is underpriced than both Walgreens Boots and the industry.

Earnings History and ESP

Considering a more comprehensive earnings history, Walgreens Boots has delivered positive surprises in each of the prior four quarters, with an average positive earnings surprise of 5.33%. In comparison, Rite Aid did deliver positive earnings in three out of last four quarters, but its average positive earnings surprise is zero.

When considering Earnings ESP, Rite Aid and Walgreens Boots have values of 0.00% and +0.88%, respectively, which implies that Walgreens Boots is at an advantage in this respect. Moreover, Walgreens Boots’ earnings estimates for the current year have advanced by 0.5% over the last 30 days, while Rite Aid’s earnings estimates for the current year remained unchanged. 

Conclusion

Our comparative analysis shows that Rite Aid holds an edge over Walgreens Boots when considering only EV/EBITDA ratio. However, when considering price performance, leverage position, net margins, estimate revisions and previous earnings performance, Walgreens Boots holds an advantage over Rite Aid. Additionally, Walgreens Boots has a better dividend yield than Rite Aid, making it a clearly better stock.

What clinches the case in favor of Walgreens Boots at this point of time is that it has a better ESP than Rite Aid, indicating a likely positive surprise. This is why it may be better to bet on Walgreens Boots over Rite Aid as both prepare to report earnings this week.

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