Rite Aid Corporation (RAD): Growth at a Reasonable Price, or Takeover Target?

Rite Aid Corporation (NYSE:RAD) is a major growth opportunity, but also a takeover candidate. The drug company is up over 25% since last week thanks to quarterly results that showed profitability for the first time in over five years, driven by an increase in prescriptions. Rite Aid has posted losses since its 2007 acquisition of the Brooks and Eckerd chains that overloaded it with debt. New income for its recent quarter came in at $62 million, versus a net loss of $52 million on a year over year basis. Billionaires Jim Simons, Israel Englander and Ken Griffin are all big-name investors in Rite Aid (check out Ken Griffin’s newest picks).

Fueling Rite Aid’s recent strong performance is its market share infringement thanks to the Walgreen Company (NYSE:WAG)–Express Scripts Holding Company (NASDAQ:ESRX) debacle. Although the duo’s contract was renegotiated several months later, Rite Aid and CVS Caremark Corporation (NYSE:CVS) are still benefiting from the dispute. Billionaire Ray Dalio – founder of Bridgewater Associates – added CVS to his portfolio last quarter (check out Ray Dalio’s biggest bets).

Express Scripts trades in line on a valuation basis – 0.4x sales and 14x earnings – but does have the highest growth prospects of the five stocks listed with a 18% 5-year EPS CAGR. George Soros upped his stake in Express Scripts by over 50% in 3Q (see George Soros’ newest picks).

Rite Aid, meanwhile, is the U.S.’s No. 3 drugstore chain behind Walgreen and CVS. Rite Aid’s stock trades with a market-cap around $1.1 billion, compared to major peers Walgreen ($35 billion) and CVS ($60 billion), that trade much higher. Both Walgreen and CVS also have solid cash positions, $1.8 billion and $1.2 billion, respectively. We believe that either major competitor can easily purchase Rite Aid, as the companies’ last major acquisition was of Duane Reade by Walgreen in 2010, for $1.1 billion. Steve Cohen of SAC Capital was one of Walgreen’s big fans last quarter, upping his stake over 10,000% (see Steve Cohen’s big bets).

So what about the valuation?