Berko: Libor and Rite Aid
Friday, July 26, 2013 7:00 AM
Dear Mr. Berko:
Several years ago, you wrote an article about how oil prices are manipulated in the big U.S. investment banks. And recently, we’ve seen that Libor interest is being manipulated by big U.S. investment banks. My wife and I would be interested in your comments. We also would like your comments on Rite Aid. Should we take our profits on the 2,000 shares we bought at 99 cents in October 2012?
S.B., Joliet, Ill.
Thomas Jefferson wrote, “I sincerely believe ... that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” That quote should be colorfully printed on every personal check, real estate mortgage, car loan, certificate of deposit, debit card, credit card and deposit slip, just as health warnings are posted on cigarette packages. It should be printed on brightly colored posters and conspicuously hung in the entrance of every branch bank, displayed like poison warning labels. Finally, the quotation should be framed by blinking neon lights and prominently hung on the walls at the corporate headquarters of every bank so it’s as evident as a nuclear warning symbol. Few of us have an inkling of the disdain, the revulsion and the low esteem in which banks such as Citibank, Fifth Third Bank, Wells Fargo, Bank of America and JPMorgan Chase hold the American consumer. By comparison, these banks make the airlines, the Postal Service, the Internal Revenue Service and the Department of Motor Vehicles look like angels.
Hey! Good for you regarding Rite Aid. That’s as cool as a moonbeam. Rite Aid Corp. (RAD-$2.90) started to move up in late January as word circulated that management pulled the pharmacy chain out of a multiyear profit slump. RAD has roughly doubled from the January price of $1.43. However, I wonder why Executive Vice President Brian Fiala and Chairwoman Mary Sammons sold 692,000 shares and 750,000 shares, respectively, last April at $2.46.
RAD, with $25.3 billion in U.S. sales and 4,700 stores in 31 states, earned 12 cents a share for the 2013 calendar year. But since its $3.9 billion purchase of 1,850 Brooks Eckerd drugstores in 2007, RAD has lost a total of more than $5 billion. And this is the first time in six years that the company has earned a profit. But the $64 question is: Can it continue? The answer: Yes! However, the next question is: Will it continue? And the answer: I don’t know. Although, based upon an impressive stock performance, RAD deserves the benefit of the doubt.
Apparently, Standard & Poor’s, Reuters, Ned Davis Research, Credit Suisse, Market Edge and Charles Schwab agree. Each has a “buy” or an “outperform” on the stock. Of course, Walgreen Co. and CVS are very positively rated, too.
The drugstore industry, a monopoly in most cities, is working through a tough environment. CVS, Walgreens and Rite Aid have been losing lucrative “front-of-store” business to discounters and non-drugstore chains such as Wal-Mart and Costco. Why spend $3 for toothpaste, $6 for mouthwash, $7 for shampoo, $3 for soap, a buck and a half for candies, $4 for batteries, etc., when these and other items can be bought for a buck at Dollar General? Last year, RAD generated 68 percent of its revenues from its pharmacy (with Obamacare, the drug business is zooming) and 32 percent from front-of-store merchandise. Those are about the same percentages as Walgreens and CVS have. However, RAD distinguishes itself from them through its emphasis on its 2,900 private-label brands, which account for more than 50 percent of front-of-store revenues. And management intends to increase its number of private-label brands, which are certainly more profitable and as good as the nationally advertised stuff 98 percent of the time.
I’m concerned that Fiala and Sammons sold their stock in April, that RAD’s balance sheet carries $9 billion in debt and only $7 billion in assets, and that consumers may reduce spending. So I recommend selling 1,000 shares. Keep the second 1,000 shares, and then say a prayer in the amen corner of your church every Sunday.