RAD - Valens Credit Report - 2019 11 07
Credit markets are grossly overstating RAD's credit risk, with a CDS of 1,312bps and a cash bond YTW of 11.160% relative to an Intrinsic CDS of 576bps and an Intrinsic YTW of 7.360%. Furthermore, Moody's is materially overstating the firm's fundamental credit risk, with their highly speculative, high-yield Caa1 credit rating seven notches lower than Valens' XO (Baa3) credit ratingIncentives Dictate Behaviorâ„¢ analysis highlights that management members have low change-in-control compensation relative to their annual compensation, suggesting they are not incentivized to seek or accept a buyout or sale of the firm, reducing event risk
Earnings Call Forensicsâ„¢ of the firm's Q2 2020 earnings call highlights that management is confident in their ability to assess store performance continuously, and they are confident they are working to help with the current opioid crisis. Furthermore, they are confident their focus on clinical services is driving pharmacy sales growth
RAD currently trades below historical averages with a 0.9x Uniform P/B. At these levels, the market is pricing in expectations for Uniform ROA to increase from 4% in 2019 to 6% in 2024, accompanied by 1% 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 significant 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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