No. 3 Rite Aid faces stiffer competition

January 21, 2007|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Rite Aid is growing, but will its stock keep on growing?

- R.C., via the Internet

Rite Aid Corp., the nation's third-largest drugstore chain behind Walgreen Co. and CVS Corp., is in a growth spurt. Already operating about 3,300 drugstores in 27 states and the District of Columbia, it intends to purchase 1,858 drugstores under the Brooks and Eckerd names, along with six distribution centers.

These are being acquired from Canada's Jean Coutu Group Inc. in a deal announced at roughly $3.4 billion in cash and stock. Expected to result in $87 million in one-time costs, the transaction needs approval from the Federal Trade Commission and could require the divestiture of some stores.

Rite Aid contends the move will increase its earnings, sales growth and cost savings, with a projected $150 million in annual synergies.

But some shareholder groups have criticized the expense and high level of debt Rite Aid will incur. Noting that Rite Aid stores have thin operating margins and aren't as strong as those of its two main competitors, critics say a combination of two less-than-stellar chains doesn't necessarily add up.

Shares of Rite Aid (RAD) are up 7 percent this year after a 56 percent gain in 2006.

In its recent quarter the company earned $1.1 million, but had a loss of 1 cent per share after paying preferred stock dividends. For fiscal year 2007 that ends in February, it projects results that will be somewhere between a net loss of $5 million and a net profit of $40 million.

Separately, Rite Aid plans to open 110 new and relocated Rite Aid stores this fiscal year. Longer-term, it intends to open 800 to 1,000 stores over the next five years, strengthening its No. 3 industry position.

The consensus analyst rating on Rite Aid stock is a "hold," according to Thomson Financial. That consists of one "strong buy," three "buys," two "holds" and four "under performs."

Prescription-drug spending nationwide is rising and generic drugs offer profit potential, but the drugstore business also faces discount, grocery and mail-order competitors. Rite Aid only recently said it will offer its own pharmacy-benefit service and has no plans to acquire such a service from another company.

Earnings are expected to decline in the current fiscal year, and the five-year annualized growth rate forecast is 2 percent, according to Thomson.

New Jersey's attorney general's office and its Division of Consumer Affairs recently charged that dozens of Rite Aid stores sold expired infant formula, baby food and over-the-counter medications. The state seeks civil penalties and consumer restitution.

My wife and I are in our late 60s and have $12,000 to invest. Your article on investing $10,000 in 2007 was interesting. Newsletter editor Sheldon Jacobs recommended T. Rowe Price New Era Fund. What is your opinion of it long term?

- B.O., Batavia, Ill.

Although it is a fine fund emphasizing natural resources, never put all your eggs in one basket.

Deciding whether to invest money in a sector fund always depends on the overall mix and size of your existing investment portfolio. Spreading your holdings around makes sense at any age, but especially in your 60s.

Energy, which has stumbled lately, represents about 65 percent of the fund's portfolio and industrial materials another 25 percent. The remainder is in financial services, utilities, business services and consumer services.

The $4.4 billion T. Rowe Price New Era Fund (PRNEX) had a return of 4 percent during the past 12 months to rank in the top one-third of natural resources funds. Its three-year annualized return of 24 percent puts it below the midpoint of its peers.

"Charles Ober, manager of the fund since 1997 and an analyst since 1980, trades in blue-chip, big-name firms, many of them household names," said Lawrence Jones, analyst with Morningstar Inc. in Chicago, who recommends putting no more than 5 percent to 10 percent of an individual's portfolio in this type of fund.

"He's covered a number of other sectors and, as a result, this fund is more diversified than some others in its field."

That diversity of portfolio hurts it when energy is skyrocketing but helps when energy encounters problems. It has been one of the least volatile natural resources funds. Ober, leading a four-member team, seeks companies selling below his estimate of private market values.

Top holdings include Schlumberger, Exxon Mobil, Cooper Cameron, Royal Dutch Shell, Baker Hughes, Diamond Offshore Drilling, Total SA, Canadian Natural Resources and Murphy Oil.

This "no-load" (no sales charge) fund requires a $2,500 minimum initial investment and has a low 0.68 percent annual expense ratio.

If an international mutual fund does not hedge against currency fluctuations, how does the movement of the dollar affect the fund?

- J.P., Orlando, Fla.

The decline of the U.S. dollar has boosted many overseas funds and attracted investors.

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