GNC Holdings (GNC) operates a chain of health and wellness stores throughout the United States and internationally. This is a strong growing company that is well managed and takes care of its stockholders quite well. Not long ago, it announced the approval of the repurchase of up to $300 million of the company's common stock. Share repurchases provide support to the stock price, and also signal that the company's board believes that the stock is undervalued at current levels. Take a look at the company's numbers and track record.
Wellington Shields upgraded GNC Corp from Gradually Accumulate to Buy. Why would they do this? Maybe it is because of the great numbers that GNC recorded this quarter. For the second quarter of this year, it reported an EPS of $0.62, $0.10 better than the analyst estimate of $0.52. And then it became one of the minority businesses this quarter also surpassing revenue expectations. Revenue for the quarter came in at $619.08 million versus the consensus estimate of $595.57 million.
Healthy Looking Company
Not only has GNC delivered strong numbers this quarter, but it has been delivering positive earnings surprises ever since its initial public offering in April 2011. The stock has grown more than 100% and analysts are tagging this stock as a solid strong growth pick. Look at these numbers:
- The retail segment contributed 75% to total revenue.
- They have opened 139 net new stores.
- Adjusted operating income soared 60% year over year.
- Operating margin improved approximately 400 basis points to 18.1% on the back of expense leverage.
Management also declared a cash dividend of 11 cents per share to be payable on June 29, 2012. For 2012 revenue and earnings guidance are going up following strong first quarter results. The company now expects to report revenues of $2.37 billion (versus the previous guidance of $2.28 billion), representing 14.5% growth. This guidance is based on achieving 8% same store sales growth for the balance of the year. The earnings guidance was boosted by 12.6% to $2.05, representing 35% growth.
Between the growing numbers, the positive "buy" rating from analysts and improved yearly guidance, GNC looks like it would make a great investment for a long term growth stock. At the same time, I am looking at creating a short term income play on the stock because it looks like it is in a good position to break out on the bullish side.
The stock has been in a trading zone since the beginning of May, between (35-42). There is also a large negative divergence in the RSI that usually signals a possible direction change, but in this case I believe that weakness is just a part of the consolidation period the stock is in.
The Options Play
The stock is presently trading at 37.92 and it appears that most of the news and opinion of the stock is to continue to move up. For this reason, I am going to look for a bullish income play on the stock. I do not like the options trading 5 points apart for a spread trade. The way the options move, I am looking at a straight option buy out into December. From there I will sell options as a calendar spread play.
- Buy the December 2012 call with a strike of 40 (priced at $2.65)
- Sell the September 2012 call with a strike of 40 (priced at $1.10)
- Net Debit to Start: $1.55
- Maximum Risk: net debit
- Maximum Length of Play: 4 months
As each month passes, it would be advantageous to sell another "40" option in October and/or November if prices allow. The anticipation of the play is to watch the stock move up to the "40" level and then resell the option for a profit.