Option Trade 
Rite Aid Corporation (NYSE:RAD) Calls 
Monday, September 14, 2015

**OPTION TRADE: Buy the RAD Jan 2016 9.000 call (RAD160115C00009000) at approximately $0.70. Place a pre-determined sell at $1.40.

Note: No protective stop losses added as yet -- but if you wish to do so make it $0.30.

by Ian Harvey

September 14, 2015


Rite Aid Corporation (NYSE: RAD), a retail drugstore chain, will report its second quarter results September 17th. The company will release its quarterly numbers before the market opens, with analysts calling for earnings of $0.03 per share on revenue of $7.6 billion. The stock is up 8.5% on the year.

In the face of a volatile market Rite Aid has held up quite well. Part of the reason is the extremely bullish earnings growth forecast analysts have for the company. Analysts forecast 52% earnings growth in 2017 versus 2016, and the stock has a very low P/E of just 4.1. For the second-quarter, analysts forecast a sharp year over year decline in earnings, with the company earning 13 cents last year, and are expected to earn just three cents this year. The earnings drop has already been priced into the stock, so as long as the company is able to hit the estimate it should be OK.

The industry as a whole has a lot working in its favor, with an aging population and The Affordable Care Act both expected to keep prescription counts high in the years to come. Recent news is optimistic, with second quarter comparable sales rising 2.1%.

Rite Aid Corporation shares are expected to touch $9.83 in the short term. This short term price target has been shared by 6 analysts.

Technical Details

Shares of Rite Aid Corporation appreciated by 5% during the past week but lost 5.18% on a 4-week basis. In the past week, the shares have outperformed the S&P 500 by 2.87% and the outperformance increases to 1.13% for the last 4 weeks.

The company shares have rallied 31.45% in the past 52 Weeks. On August 5, 2015 the shares registered one year high of $9.47 and one year low was seen on October 13, 2014 at $4.42.

The 50-day moving average is $8.58 and the 200 day moving average is recorded at $8.40.


Previous Earnings

Rite Aid last announced its quarterly earnings data on Thursday, June 18th. The company reported $0.04 earnings per share for the quarter, beating the Thomson Reuters consensus estimate of $0.03 by $0.01. The firm earned $6.60 billion during the quarter, compared to analyst estimates of $6.65 billion. The company’s quarterly revenue was up 2.8% compared to the same quarter last year.

During the same quarter last year, the company earned $0.04 EPS. Equities research analysts predict that Rite Aid will post $0.21 EPS for the current fiscal year.

Future Earnings

In its report early Thursday, this Fortune 500 company is expected to say that its EPS tumbled from $0.13 a year ago to $0.06 for the three months that ended in August. The Wall Street estimate is just $0.03 per share. Analysts did overestimate EPS in the previous quarter.

However, the consensus of 11 estimates has revenues up sharply to $7.43 billion for the second quarter. Here Wall Street is more optimistic, with a consensus expectations posted at $7.56 billion. And note that the analysts have tended to underestimate revenue in recent quarters.

Positive Factors

Rite Aid is a most volatile stock with the stock having a beta of 1.46, and a reputation of displaying significant rises and falls.

The recent rise in bearish sentiment for the stock was due to the significant gain that the stock had made this year, reaching an all-time high price of $9.47 during the first week of August, by which time it had made a year-to-date gain of roughly 24%.

The valuation for the stock has also been hovering close to its all-time high mark. This added with the high volatility must have made investors turn cautious about the stock. The fall in the stock’s price must have appeared as an attempt by the market to adjust the stock’s price downwards, leading to the investors forecasting that the stock price would fall further before reaching a justifiable level, which is very positive for this option trade.

Cowen & Company believe that Walgreens Boots Alliance Inc., due to performance, sees a high possibility that the corporation might be interested in more acquisitions. In that regard, Rite Aid Corporation appears to be the most likely target.

Analysts Opinions

Rite Aid‘s stock had its “buy” rating restated by analysts at Deutsche Bank in a research note issued last Thursday. They currently have a $10.00 price target on the stock. Deutsche Bank’s price target suggests a potential upside of 22.70% from the company’s previous close.

The company has also been the subject of a number of other research reports:-

• Bank of America initiates coverage on its rating on Rite Aid Corporation. The global brokerage major announces a current price target of $11 per share. Analysts at the Bank of America have a current rating of Buy on the shares. The rating by the firm was issued on August 13, 2015.

• Mizuho initiated coverage on Rite Aid in a report on Wednesday, May 27th. They set a “buy” rating and a $10.00 target price for the company.

• Vetr downgraded Rite Aid from a “buy” rating to a “hold” rating and set a $8.90 price objective for the company. in a research note on Wednesday, May 27th.

• Zacks raised Rite Aid from a “hold” rating to a “buy” rating and set a $9.25 target price on the stock in a research report on Tuesday, June 9th.

• Credit Suisse assumed coverage on Rite Aid in a report on Thursday, June 11th. They set an “outperform” rating and a $10.00 price objective on the stock.

• Finally, Evercore ISI reaffirmed a “buy” rating and issued a $9.50 target price on shares of Rite Aid in a report on Wednesday, June 17th.

Three investment analysts have rated the stock with a hold rating, seven have issued a buy rating and one has issued a strong buy rating to the company’s stock. The company presently has a consensus rating of “Buy” and a consensus target price of $10.09.

Harvey’s Options Volatility Indicator


Expect an upbeat report, and the stock to trend higher on the news.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

**OPTION TRADE: Buy the RAD Jan 2016 9.000 call (RAD160115C00009000) at approximately $0.70. Place a pre-determined sell at $1.40.

Note: No protective stop losses added as yet -- but if you wish to do so make it $0.30.

”Success is simple. Do what's right, the right way, at the right time.”

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Options traders win because they are successful.

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