RAD - Valens Credit Report - 2019 05 10
Credit markets are grossly overstating RAD's credit risk, with a CDS of 1,404bps and a cash bond YTW of 10.860% relative to an Intrinsic CDS of 523bps and an Intrinsic YTW of 7.470%. Furthermore, Moody's is materially overstating the firm's fundamental credit risk, with their highly speculative, high-yield B3 credit rating six notches lower than Valens' XO (Baa3) credit rating.Incentives Dictate Behaviorâ„¢ analysis highlights that members of management have low change-in-control compensation relative to their annual compensation, with multiples ranging from 1.4x to 2.4x. This reduces credit event risk as management is not well-incentivized to seek or accept a change-in-control.
RAD currently trades below recent averages with a 0.8x Uniform P/B. At these levels, the market is pricing in expectations for Uniform ROA to increase from 4% in 2019 to 6% levels through 2024, accompanied by 3% Uniform Asset shrinkage going forward. Given that valuations are likely being compressed by the market's inaccurate perception of the firm's credit risk, RAD could see material credit-driven equity upside if credit spreads tighten, even without fundamental improvement.
Rite Aid is a pharmacy retail healthcare company. The company's Retail Pharmacy segment sells brand and generic prescription drugs, as well as an assortment of front-end products including health and beauty aids, personal care products, seasonal merchandise, and a private brand product line. The company's Pharmacy Services segment provides pharmacy benefit management (PBM) options through its EnvisionRxOptions and MedTrak PBMs, respectively. EnvisionRxOptions also provides mail-order and specialty pharmacy services through EnvisionPharmacies; a claims adjudication software platform in Laker Software; and a national Medicare Part D prescription drug plan through its EnvisionRx Plus product offering.
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
The integrity of Valens Research is founded in our disciplined processes and analytics. No “star” analysts. No corporate advisory relationships. No-nonsense opinions and recommendations.
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