Rite Aid Corporation (RAD): A $2.30 Stock that is Worth Sprint Nextel Corporation (S)’s $7.00 Buy Offer

Valuation

One final point to consider is the level of value being presented in shares of Rite Aid Corporation (NYSE:RAD) for a potential acquirer. Seeing as how Sprint is not profitable, it might be best to view its acquisition on a sales/valuation basis. Most assume that Sprint can achieve profitability and does have positive EBITDA, but still has not crossed the crucial line into net profit, nor is it close.

“If” Sprint is acquired for $7.00 per share then it would be purchased for about 0.70 times sales. The company has sales of $35.34 billion and a $7 purchase would be $25.15 billion. Compared to both Verizon and AT&T, Sprint Nextel Corporation (NYSE:S) at $7.00 is still a 35%-50% discount to sales. Obviously, the discount is due to margins, as AT&T and Verizon trade with operating margins that are 10-12 times greater than Sprint. Therefore, an acquirer of Sprint validates the offer by assuming that there is room for improvement.

Looking at Rite Aid, the comparison at $2.30 is so far off from its competitors that it’s not even worth comparing. With that said, at $7.00 a share Rite Aid would trade with a market cap of $6.20 billion and a price/sales of 0.24. Remember, this is at $7.00 a share, which would be a premium of more than 200%, and even with this premium, Rite Aid still trades at a deeper discount to its largest competitors CVS and Walgreens (by 50%-70%) than Sprint Nextel at $7.00.

Conclusion

Just to make sure you understand, Rite Aid Corporation (NYSE:RAD) with a 200% premium on top of its six month 100% gains it is still cheaper than Sprint Nextel Corporation (NYSE:S) when compared to each company’s respective industries. Not to mention, Rite Aid is now profitable, Sprint is not, and Rite Aid has had no offers to note. There is two points to this comparison:First, Rite Aid has a tremendous amount of upside from this point forward, second, Rite Aid is highly attractive as an acquisition target despite its debt. As a result, I would watch the stock closely, and would set a price target for $7.00, whether it be by acquisition or in stock performance, I think Rite Aid is clearly worth it and will reach the price target.

Brian Nichols is long ALU. The Motley Fool has no position in any of the stocks mentioned.