“Cut-to-the-Chase” Recommendations
- Week Beginning -
Monday, December 25, 2017

by Ian Harvey

IMPORTANT NOTE: There is no stop-loss or pre-determined sell price recommended – this is left to the discretion of the individual trader.


Option Trade - Rite Aid Corporation (NYSE:RAD) Calls

Thursday, December 28, 2017

** OPTION TRADE: Buy the RAD FEB 16 2018 2.000 CALL at approximately $0.25.

Sell price is left to your own judgment.

Rite Aid Corporation (NYSE:RAD), a retail drugstore chain, is expected to report earnings on Wednesday, January 03, after the market closes. The report will be for the fiscal Quarter ending Nov 2017. Based on analysts' forecasts, the consensus EPS forecast for the quarter is $-0.02. The reported EPS for the same quarter last year was $0.02.

Wall Street brokerages expect that Rite Aid Co will post $7.74 billion in sales for the current quarter. Rite Aid posted sales of $8.09 billion in the same quarter last year.

Analysts expect that Rite Aid will report full-year sales of $7.74 billion for the current fiscal year, with estimates ranging from $29.65 billion to $30.96 billion. For the next year, analysts anticipate that the company will post sales of $21.64 billion per share, with estimates ranging from $20.96 billion to $22.32 billion.

This year has been a rocky ride for Rite Aid Corporation, with the RAD stock price down 75% in 2017. At the beginning of the year, there was hope that Walgreens Boots Alliance Inc. (NASDAQ:WBA) would pull off the deal to buy Rite Aid. Even in June, there was reason to believe that WBA and RAD would prevail over the Justice Department.

But then the deal fell through. Walgreens quickly worked out another agreement with Rite Aid and regulators gave their stamp of approval in September.

And now, Rite Aid is starting to claw its’ way out of its’ hole.

Rite Aid is quietly staging a relative comeback. The stock's close Friday above $2 is the first time that's happened this month. Shares of Rite Aid have soared 46% since bottoming out in early November.

Influencing Factors

Rite Aid remains a disaster for all of 2017, shedding a little more than three quarters of its value year to date even after its recent bounce. Its stock came undone when its deal to be acquired fell apart. It eventually settled for a partial sale, unloading 1,932 of its stores for $4.375 billion in cash. The market didn't initially like the scaled-back asset sale, but knowing that the proceeds will go to pay down Rite Aid's gargantuan debt load should make things easier in 2018.

Rite Aid has the cash flow it needs to reduce a crushing debt burden and RAD stock has bounced off its lows as a result.

With a debt level four times its market cap, this sale gives RAD much-needed capital it can use to pay down its massive debt load. Rite Aid will also have lower debt-service payments, which will improve the cash situation. Perhaps the credit rating will also improve, which will allow them to lower the interest costs of existing debt.

Once Walgreens started acquiring Rite Aid stores, confidence returned to the stock. The RAD stock price went from a low of $1.38 to almost $2.25 per share within two weeks.

Still, cash coming in and underperforming stores going out, bodes well for RAD stock. Best of all for Rite Aid, its remaining stores have an estimated worth of almost $6 billion. This figure is about three times the current market cap for Rite Aid stock.

Moreover, with the sale, the company has made changes that should improve customer experiences. With its presence on both coasts, Rite Aid becomes more of a regional play. Rite Aid remains the largest drugstore chain in its core region, the East Coast. Operating mostly in a region where the company remains strongest should help. Also, the store is boosting its online presence, which should at least prevent the chain from falling further behind.

RAD is a stock that has staged big comebacks before ($2 to $9 in 2001, $2 to $6 in 2003 and $1 to $9 in 2012-14), so this is a stock that does go down, but normally doesn’t stay down. The drivers of the most recent comeback in 2012-14 were leverage reduction, a depressed valuation and a turnaround in comparable sales growth.

Amazon appears to have canceled a pharmaceutical wholesaler application in the state of Maine, according to analysts from RBC Capital Markets.

No matter which way you look at it, this is a positive for RAD stock.

Either Amazon is not getting into the pharma business any time soon or it is exploring alternative ways to jump into the pharma business. Either way, RAD is a winner.

If Amazon is exploring alternative ways to jump into the pharma business, then that implies that Amazon is looking to acquire licenses via a buyout, as opposed to going through the lengthy process of applying for licenses. The most obvious acquisition target in this space is Rite Aid.

Analysts and Hedge Funds Opinions

Deutsche Bank started coverage on shares of Rite Aid (NYSE:RAD) in a note issued to investors on Monday, December 4th. The firm set a “hold” rating and a $2.25 price target on the stock. Deutsche Bank’s target price indicates a potential upside of 16.58% from the company’s current price.

Several other analysts have also recently commented on the company…..

  • Zacks Investment Research upgraded Rite Aid from a “strong sell” rating to a “hold” rating in a report on Tuesday, August 29th.
  • Loop Capital initiated coverage on Rite Aid in a report on Monday, September 11th. They set a “hold” rating and a $2.50 price target on the stock.
  • Royal Bank of Canada initiated coverage on Rite Aid in a report on Tuesday, September 19th. They set a “sector perform” rating and a $2.50 price target on the stock.
  • Finally, Guggenheim reiterated a “neutral” rating and set a $2.00 price target on shares of Rite Aid in a report on Monday, October 2nd.

Two investment analysts have rated the stock with a sell rating, six have assigned a hold rating, two have given a buy rating and one has issued a strong buy rating to the company’s stock. The stock currently has an average rating of “Hold” and a consensus target price of $3.25.

Institutional investors that have recently made a change to their positions in the stock….

  • Stifel Financial Corp boosted its stake in Rite Aid Co by 17.2% during the third quarter. The firm owned 536,366 shares of the company’s stock after acquiring an additional 78,805 shares during the quarter. Stifel Financial Corp owned 0.05% of Rite Aid worth $1,049,000 as of its most recent filing with the SEC.
  • California Public Employees Retirement System grew its position in Rite Aid by 37.2% during the third quarter. California Public Employees Retirement System now owns 3,296,247 shares of the company’s stock worth $6,461,000 after buying an additional 893,314 shares in the last quarter.
Summary

An influx of cash from a huge deal with Walgreens Boots Alliance will go towards paying down a ton of debt, resulting in sizable leverage reduction soon. The EV/EBITDA multiple on RAD stock is just over 7 — exactly where it was back in 2013. Meanwhile, comparable sales growth will likely go from negative to positive soon, because comp growth at RAD is cyclical (comps were up in fiscal 2009, down in 2010 and 2011, up in 2012, down in 2013, up for the next 3 years and down the next 2 years).

This stock has propensity for big comebacks and with leverage reduction and a potential buyout on the horizon, it certainly feels like another big comeback is about to unfold.

Rite Aid has a market capitalization of $2,150.00, a PE ratio of 25.25 and a beta of 1.80. The company has a debt-to-equity ratio of 9.71, a current ratio of 1.74 and a quick ratio of 0.77. Rite Aid Co. has a 52-week low of $1.38 and a 52-week high of $8.77.


Option Trade - Walgreens Boots Alliance Inc. (NASDAQ:WBA) Calls

Wednesday, December 27, 2017

** OPTION TRADE: Buy the WBA JAN 19 2018 75.000 CALL at approximately $1.25.

Sell price is left to your own judgment.

Walgreens Boots Alliance Inc. (NASDAQ:WBA), a global pharmacy-led, health and wellbeing enterprise, will report earnings on Thursday, January 01, before the market opens. Analysts expect Walgreens Boots Alliance to report $1.27 EPS. They anticipate $0.17 EPS change or 15.45 % from last quarter’s $1.1 EPS. WBA’s profit would be $1.26B giving it 14.31 P/E if the $1.27 EPS is correct.

Walgreens Boots Alliance is the first global pharmacy-led, health and wellbeing enterprise. The company’s heritage of trusted health care services through community pharmacy care and pharmaceutical wholesaling dates back more than 100 years.

Walgreens Boots Alliance is the largest retail pharmacy, health and daily living destination across the U.S. and Europe. Walgreens Boots Alliance and the companies in which it has equity method investments together have a presence in more than 25 countries and employ more than 385,000* people. The company is a global leader in pharmacy-led, health and wellbeing retail and, together with the companies in which it has equity method investments, has more than 13,200* stores in 11* countries as well as one of the largest global pharmaceutical wholesaler and distribution networks, with more than 390 distribution centers delivering to more than 230,000 pharmacies, doctors, health centers and hospitals each year in more than 20 countries. In addition, Walgreens Boots Alliance is one of the world’s largest purchasers of prescription drugs and many other health and wellbeing products.

The company’s portfolio of retail and business brands includes Walgreens, Duane Reade, Boots and Alliance Healthcare, as well as increasingly global health and beauty product brands, such as No7, Soap & Glory, Liz Earle, Sleek MakeUP and Botanics.

The company ranks No. 1 in the Food and Drug Stores industry of Fortune magazine’s 2017 list of the World’s Most Admired Companies.

Influencing Factors

The drugstore industry saw big changes in 2017, with Walgreens Boots Alliance finally agreeing to acquire a massive portion of Rite Aid's (NYSE: RAD) store network. The potential growth from expanding its network could dwarf the roughly $4.38 billion price tag that Walgreens will have to pay under its agreement with its rival drugstore chain.

Walgreens Boots Alliance announced recently that it has entered into an agreement to reduce its stake in Guangzhou Pharmaceuticals Corporation, a pharmaceutical wholesaling joint venture in China, following an offer from its joint venture partner Guangzhou Baiyunshan Pharmaceutical Holdings Co. Ltd.

Subject to regulatory review and approval and other customary closing conditions, Walgreens Boots Alliance will sell a 30% interest in Guangzhou Pharmaceuticals Corporation to Guangzhou Baiyunshan Pharmaceutical Holdings that, following the proposed sale, would own 80%. Upon completion, Walgreens Boots Alliance will own a 20% interest in Guangzhou Pharmaceuticals Corporation and will continue to account for its remaining stake as an equity method investment.

WBA has set a major milestone to expand global footprint with its decision to acquire a 40% stake in Sinopharm Holding Guoda Drugstores Co., Ltd. (GuoDa), a subsidiary of China National Accord Medicines Corporation Ltd. On successful completion, this investment should provide a strong impetus to Walgreens’ worldwide retail pharmacy business.

Per a report by IBISWorld, revenues for the Pharmacy and Drugstore industry in China have been growing at an annualized rate of 16.6% over the past five years now. Per the report, substantial growth in demand for drugs in domestic retail purchase, relatively expensive drug prices in hospitals and increasing self-medication rate are major factors spurring this stupendous growth.

Walgreens already has a strong base in China, courtesy of its merger with Alliance Boots. This latest development with GuoDa will further strengthen its business in this densely populated region. The company is particularly excited about its opportunity to invest in the country’s fast-growing retail pharmacy sector.

Analysts and Hedge Funds Opinions

Walgreens Boots Alliance was upgraded by research analysts at Vetr from a “buy” rating to a “strong-buy” rating in a research report issued to clients and investors on Tuesday, December 12th.

Several other analysts have also recently commented on the company…..

  • Royal Bank of Canada began coverage on shares of Walgreens Boots Alliance in a report on Tuesday, September 19th. They set an “outperform” rating and a $96.00 price objective on the stock.
  • Jefferies Group reissued a “buy” rating and set a $95.00 price objective on shares of Walgreens Boots Alliance in a report on Monday, October 2nd.
  • Credit Suisse maintained it with “Outperform” rating and $95 target in Thursday, September 1 report.
  • Finally, Needham & Company LLC reissued a “buy” rating and set a $94.00 price objective on shares of Walgreens Boots Alliance in a report on Thursday, October 12th.

One research analyst has rated the stock with a sell rating, nine have assigned a hold rating, thirteen have assigned a buy rating and one has given a strong buy rating to the company. The stock currently has an average rating of “Buy” and a consensus target price of $86.89.

Institutional investors that have recently made a change to their positions in the stock….

  • Andra AP fonden raised its holdings in shares of Walgreens Boots Alliance by 6.9% in the third quarter. The institutional investor owned 62,300 shares of the pharmacy operator’s stock after purchasing an additional 4,000 shares during the period. Andra AP fonden’s holdings in Walgreens Boots Alliance were worth $4,811,000 as of its most recent SEC filing.
  • Schroder Investment Management Group lifted its stake in shares of Walgreens Boots Alliance by 17.1% during the 1st quarter. Schroder Investment Management Group now owns 2,588,887 shares of the pharmacy operator’s stock valued at $215,681,000 after buying an additional 378,686 shares in the last quarter.
  • American International Group Inc. increased its holdings in Walgreens Boots Alliance by 1.9% in the 1st quarter. American International Group Inc. now owns 441,183 shares of the pharmacy operator’s stock valued at $36,640,000 after acquiring an additional 8,322 shares during the last quarter.
  • Finally, Cibc World Markets Corp increased its holdings in Walgreens Boots Alliance by 8.8% in the 1st quarter. Cibc World Markets Corp now owns 374,075 shares of the pharmacy operator’s stock valued at $31,067,000 after acquiring an additional 30,341 shares during the last quarter.

Insider News……

Director John Anthony Lederer purchased 20,000 shares of Walgreens Boots Alliance stock in a transaction that occurred on Thursday, October 26th. The shares were bought at an average price of $67.00 per share, for a total transaction of $1,340,000.00. Following the completion of the transaction, the director now directly owns 50,000 shares of the company’s stock, valued at $3,350,000.

Summary

Walgreens Boots Alliance has a market capitalization of $72,010.00, a PE ratio of 19.24, a price-to-earnings-growth ratio of 1.31 and a beta of 1.22. The company has a current ratio of 1.07, a quick ratio of 0.59 and a debt-to-equity ratio of 0.45. Walgreens Boots Alliance has a 1-year low of $63.82 and a 1-year high of $88.00.





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