Rite Aid Corporation (RAD) Stock Buyout Hopes Rise as Earnings Loom

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About a year ago, Walgreens Boots Alliance Inc’s (NASDAQ:WBA) plans to acquire Rite Aid Corporation (NYSE:RAD) were not looking so hot, and Rite Aid stock was under pressure. The FTC was concerned about the combined company controlling too much of the market, and Fred’s, Inc.’s (NASDAQ:FRED) plans to buy up to 1,200 Rite Aid locations was also giving regulators an uneasy feeling.

Rite Aid Corporation (RAD) Stock Buyout Hopes Rise as Earnings Loom

Fast forward to 2017, and the Donald Trump administration’s more accommodating corporate policies, and the deal appears to have legs once again.

What’s more, Fred’s reiterated its pledge to buy Rite Aid stores yesterday, and the New York Post reported that “more than one prominent investor has recently approached Fred’s Inc. about investing money in the regional drugstore chain,” which could help the retailer acquire the cash it needs for the acquisitions.

The news provided a 7.75% boost for Rite Aid stock just as traders are gearing up for fourth-quarter earnings later this month on April 25. Currently, Wall Street is expecting a loss of 2 cents per share, compared to a profit of 6 cents per share a year ago. Revenue, meanwhile, is expected to come in flat at $8.27 billion.

Expectations ahead of the event are naturally muted. According to Thomson/First Call, RAD has attracted just three buy ratings and five holds.

The 12-month consensus price target of $6.29, however, represents a sizeable margin of about 37% Thursday’s close.

RAD Stock Chart


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Options activity is about what you’d expect for a stock that is on the verge of being acquired. The April/May put/call open interest ratio currently rests at 0.59, as call heavy arbitrage plays continue to dominate the options pits. However, there is some trepidation heading into earnings, with the 28 April put/call OI ratio rising to 0.74.

Overall, 28 April implieds are pricing in a potential post earnings move of about 16.7% for Rite Aid stock. This places the upper bound at $5.25 and the lower bound at $3.75. That said, any more news on the merger front could provide a much larger than expected move.

2 Trades for Rite Aid Stock

Bear Put Spread: Let’s face it, earnings have been far from stellar for Rite Aid in the past year, and there’s no reason to believe this quarter will deviate from the pattern. Furthermore, RAD has a technical pattern of rallying and retreating for the past several months, meaning that the shares are likely due to pull back within the next month.

As such, traders looking to bank on a continuation of this pattern might want to consider a May $4/$4.50 bear put spread. At last check, this spread was offered at 18 cents, or $18 per pair of contracts. Breakeven lies at $4.32, while a maximum profit of 32 cents, or $32 per pair of contracts, is possible if RAD stock closes at or below $4 when May options expire.

Call Spread: On the other hand, merger news could send the shares skyrocketing, when and if it arrives — as yesterday’s tidbit from Fred’s indicates. Traders looking to bet on a rally might want to consider a May $5/$6 bull call spread. At last check, this spread was offered at 25 cents, or $25 per pair of contracts.

Breakeven lies at $5.25, while a maximum profit of 75 cents, or $75 per pair of contracts, is possible if RAD stock closes at or above $6 when May options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/04/rite-aid-corporation-rad-stock-hopes/.

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