Rite Aid Analysts Missed Stock Drop: Call of the Day
New York, July 12 (Bloomberg) -- A year ago, 13 analysts followed Rite Aid Corp. for U.S. brokerages. Now, as the stock has tumbled and analysts have cut their ratings, the crowd of researchers has dwindled to eight.
Shares of the No. 3 U.S. drugstore chain have dropped 88 percent to 6 from a high of 50 15/16 in January 1999, as the company struggled with acquisitions and regulators investigated its accounting practices. Still, most analysts maintained their positive outlooks for the company as the share price faded, and only recently have they been cutting their ratings.
Donaldson, Lufkin & Jenrette Inc. analyst Edward Comeau cut the No. 3 U.S. drugstore chain to ``underperform'' from ``market perform'' today, after the company reported wider losses in its fiscal first quarter and last year and restated earnings for two years.
``Any way investors care to slice it, Rite Aid shares are terribly expensive at these levels and will hold little more than option value for quite some time,'' Comeau said in a report to clients. ``The company certainly has a long road ahead.''
With today's decline, Rite Aid's market value has fallen to $1.9 billion, ranking it 461st in size in the S&P 500.
Thirteen analysts covered the stock as of May 1999, according to First Call/Thomson Financial. Of the eight who remain, six analysts rate Rite Aid a ``hold,'' Comeau's rating equals a ``sell'' and one analyst, Goldman, Sachs & Co.'s John Heinbockel, has kept his opinion at ``market outperform,'' the equivalent of ``buy.''
Walgreen Co., the largest U.S. drugstore chain, has 18 analysts following it, with 14 ``buy'' ratings, four ``holds'' and no ``sells.'' Fourteen analysts cover CVS Corp., the No. 2 chain, with 12 ``buy'' ratings and two ``holds.''
While Walgreen's shares returned 130 percent over the past three years and CVS's returned 69 percent, Rite Aid's shares dropped 66 percent.
Dropping Coverage
Lehman Brothers Inc.'s Meredith Adler kept her ``buy'' rating on the stock as the shares climbed from 28 to their peak and back again. She cut her rating to ``neutral'' when the shares slid to 8 1/2 in January, and dropped her coverage altogether when they slumped to 5 7/16.
Adler said in a report in May that she was dropping coverage because of ``the current lack of financial information and the impossibility of projecting cash flow or earnings without that information.''
Legg Mason Wood Walker Inc. analyst Sally Wallick rated the stock ``outperform'' from July 1997 until October 1999, when she also stopped following the company.
Comeau, the top-rated analyst for food and drugstore chains in Institutional Investor's annual survey, told the magazine last year that he regretted keeping his ``buy'' recommendation on the stock for so long. He initiated coverage in December 1996 with that rating and maintained it until March 1999, when he lowered it to ``market perform,'' after the stock had slid to 24 3/4.
Comeau couldn't be reached for comment.
Contrarian
Gary Vineberg may have been the only analyst to forecast Rite Aid's troubles. Vineberg, who worked at Merrill Lynch & Co. for five years, rated the stock either a ``hold'' or ``sell.''
Vineberg said colleagues questioned some of his recommendations and he was heckled at investor meetings. Rite Aid's then-chief executive, Martin Grass, wrote him sarcastic letters about his coverage as Rite Aid's shares climbed steadily in 1997, he said.
``I really appreciate your negative comments on Rite Aid,'' Grass wrote in July of that year. ``The harder I work and the more you write seem to be the perfect formula to increase our stock price.''
Vineberg said he disagreed with Rite Aid's growth strategy, as the company ballooned in size by gobbling up other chains, including Thrifty Payless Holdings and Perry Drug Stores Inc.
``Other analysts really were in the camp that the best way to grow was to consolidate the industry through acquisitions,'' said Vineberg, who left Merrill in 1998 and now is an independent hedge-fund advisor. ``I believed buying old drugstore chains for market share was a waste of money.''
Rite Aid's troubles surfaced in March 1999 when the Camp Hill, Pennsylvania, company said its rapid expansion and ballooning costs would pull earnings well below forecasts, sending its shares down 39 percent. In June last year, the company restated earnings after a review of its accounting practices by the Securities and Exchange Commission.
Rite Aid blamed its turmoil on difficulty integrating numerous acquisitions, such as Thrifty Payless. The company expanded through purchases to keep up with the Walgreen and CVS Corp.
Rite Aid's shares got a boost in December when the company named former Kroger Co. executive Robert Miller as chief executive, replacing Grass, who had quit in October amid slumping earnings and a regulatory review of the company's accounting practices.
The stock surged 54 percent on expectations that new management would clean up the business, and analyst John Ransom at Raymond James Financial Inc. lifted his rating on the news.
The optimism was short-lived -- the shares dropped in January when it delayed reporting earnings, and they reached a low of 4 7/8 in May.
Regardless of Vineberg's correct long-term forecast, he said, it was tough to go against the crowd.
``While the stock was going up, it looked like I was wrong,'' said Vineberg. ``I stuck my head out and had it handed it to me.''
Jul/12/2000 19:02 ET
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