Is Now the Time to Buy Rite Aid Stock, or Should You Hold Off?

Tickers in this article: CVS MCK RAD WAG

NEW YORK ( TheStreet) -- Rite Aid shares lost more than 16% of their value in the past three months. Will they head lower or is it high time to buy the stock?

The operator of chain retail drugstores in the U.S. has several strong points but its current situation doesn't make the stock a buy. Let's see why.

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In the past quarter, Rite Aid showed a modest revenue gain. Other leading chains such as Walgreen and CVS Caremark keep increasing their sales at a much higher pace because they have also been opening new stores throughout the U.S.

Walgreen reported third quarter sames store sales up 2.2% . CVS same-store sales rose 3.3% in the latest quarter.

Nonetheless, by one measure Rite Aid's stock isn't high. The stock's enterprise value (market capitalization plus debt minus cash)-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio is 10.8. Walgreen's ratio is at 12.26.

But this lower ratio isn't enough to make Rite Aid a purchase opportunity. For one, Rite Aid continues to hold a huge debt, which also imposes on its cash flow with high interest payments and elevated debt burden on its balance sheet. Also, the company has a $2 billion deficit equity, which also raises its financial risk. These issues will continue to impede the company's progress.

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Rite Aid's management is trying to find ways to deal with these problems by relocating or closing less profitable locations and renovating stores to improve sales. In the past quarter the company closed seven stores and remodeled 105. In the past year, it closed a net of 34 stores.

For the fiscal 2015, the company estimates $26.25 billion revenue, or about a 3% sales growth year over year.

Rite Aid projects its same store sales, which are sales of stores that have been open for at least one year, to increase by 3.5%. So this means, most of the company's growth in sales is expected to come from improved sales in its existing stores.

This guidance is partly based on Rite Aid's expanded collaboration with McKesson to sell generic pharmaceuticals. Rite Aid faced timing issues with this deal which could have also contributed to the stock's fall in the past several months.

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Alas, this collaboration didn't stop the company from cutting its full year guidance in its latest earnings report.

Rite Aid could also face stronger competition aboard because Walgreen has purchased the remaining shares of 55% of Alliance Boots, which puts Walgreen in the international arena.

Rite Aid is making the right plays to improve its current situation, but the company's low growth, high debt and potential stronger competition from Walgreen could impede its progress.