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The Ratings Game: Rite Aid stock dives after Deutsche Bank slashed target to $1, warns of a ‘dramatic negative inflection point’

Shares of Rite Aid Corp. dove to a 2 1/2-year low Thursday, after Deutsche Bank analyst George Hill issued a dire warning that the drugstore chain’s equity could be worthless.

Hill cut his rating on Rite Aid’s stock
RAD,
-17.18%

to sell, after being at hold for the past two years. He slashed his price target to $1 from $16, with the new target implying downside of about 86% from current prices.

The stock sank 17.2% to $6.99, the lowest close since Oct. 2, 2019.

Hill said that when Rite Aid reports fiscal fourth-quarter results on April 14, the “key investor focus” will be on fiscal 2023 guidance for earnings before interest, taxes, depreciation and amortization (Ebitda). In December, the company had said it expected 2023 adjusted Ebitda that was “significantly above” $430 million.

Hill said the reason the 2023 outlook is so important is because the company needs to generate about $400 million to $450 million in annual adjusted Ebitda to continue as an operating company.

“At a number below $400 million, the equity arguably has no value as the company is not in a position to generate real returns to shareholders,” Hill wrote in a note to clients. “Unfortunately, we believe COVID has hastened the decline of the retail pharmacy segment and we see the potential for a dramatic negative inflection point for [Rite Aid] shares as this preliminary F2023 outlook seems to be unattainable.”

Rite Aid is expected to report an adjusted loss of 49 cents per share on revenue of $5.21 billion for the quarter through February, according to a FactSet survey of analysts, after a loss of 78 cents a share on revenue of $5.92 billion in the same period a year ago.

For fiscal 2023, the FactSet consensus is for a per-share loss of 48 cents and revenue of $21.45 billion. Hill’s estimate for 2023 adjusted Ebitda is $377 million, which could cause investors to question the company’s ability to sustain itself as a going concern.

The stock has plummeted 52.4% year to date, while shares of rival CVS Health Corp.
CVS,
+1.52%

have gained 0.4% and the S&P 500 index
SPX,
+0.43%

has slipped 5.6%.

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