Every Friday, I write about unusual options activity in the markets. Each week the subject matter is different.
Interestingly enough, I’ll be looking at three call options currently in the money. They all expire in 35 days on Aug. 19.
Also, coincidentally, is the fact that two of the three names on my list went public by merging with special purpose acquisition companies (SPACs). Even though SPACs have lost their attraction in 2022, they’re interesting nonetheless.
Avantor (AVTR)
The Pennsylvania-based life sciences company acts as a one-stop shop for scientists.
“We serve as a one-stop shop, providing scientists all they need to conduct their research: materials & consumables, equipment & instrumentation and services & specialty procurement,” Pg. 1 of its 2021 10-K states.
Although Avantor’s (AVTR) legacy dates back to 1904, it only went public in May 2019, selling 238.05 million shares at $14. It used the net proceeds to redeem 100% of its senior preferred stock and some of its term loans outstanding.
Despite being down 31.8% year-t0-date, shareholders who bought IPO shares in 2019 -- and are still holding today -- have doubled their money.
In Q1 2022, Avantor grew revenues by 9.2% to $1.95 billion. Excluding acquisitions and currency, organic sales increased 5.1% during the quarter. All three of its operating regions experienced sales growth during the quarter. On the bottom line, its adjusted earnings per share increased 8.6% to $0.38.
One of the financial metrics I use to find good value is free cash flow (FCF) yield, defined as FCF divided by market cap. In the trailing 12 months (TTM) ended March 31, its free cash flow was $860 million. Based on a market cap of $17.2 billion, it has an FCF yield of 5%. I consider anything between 4% and 8% to be fair value.
Avantor’s Aug. 19 $27.50 call option is currently in the money by 5% or $1.33. Its share price will have to get to around $30 over the next 35 days to break even.
That seems more than doable. Of the three call options, Avantor possesses the least amount of risk. Govern yourself accordingly.
The Beauty Health Company (SKIN)
The Beauty Health Company (SKIN) became a public company in May 2021 through a combination with Vesper Healthcare Acquisition Corp., a SPAC that raised $400 million by selling 40 million units at $10 each in September 2020.
The combination valued the combined entity at $1.14 billion, which included a $350 million PIPE (private investment in public equity). Those PIPE investors owned 28% of Beauty Health post-business combination. The SPAC shareholders owned 37%, Beauty Health’s shareholders owned 25%, and the SPAC’s shareholders owned the remaining 10%.
Beauty Health’s primary brand is HydraFacial. In Q1 2022, it had revenue of $75.4 million, 58.7% higher than a year earlier. On the bottom line, it generated an adjusted net loss of $8.5 million, considerably higher than its $100,000 loss in Q1 2021.
In 2022, it expects sales of $335 million at the midpoint of its guidance. That’s up $10 million from its previous guidance. The company expects an adjusted EBITDA of $50.0 million in 2022.
The company stated the following in its December 2020 announcement about the combination:
“HydraFacial is well positioned to benefit from four key advantages: (i) a large and growing market with favorable demographic trends; (ii) a technologically advanced offering with high consumer and provider satisfaction; (iii) a shift in consumer behavior in seeking approachable and effective skin health solutions that bridge the gap between traditional beauty and healthcare options; and (iv) a diversified channel mix that spans multiple touch points including day and resort spas, medical offices such as dermatology and plastic surgery, and beauty retail.”
Of the 11 analysts covering its stock, 10 rates it a “buy” with one “hold” and a median target price of $23, 77% higher than its current price.
As for the Aug. 19 $12.50 call, it’s trading slightly in the money with a bid price of $1.55, which means its breakeven is about $14. With 35 days until expiry, the Beauty Company’s call option looks like a smart way to bet on its stock.
Faraday Future Intelligent Electric (FFIE)
The Aug. 19 $3 call option for Faraday Future Intelligent Electric (FFIE) currently has a $4.10 bid price. So, even though it looks deep in the money, it’s not. The breakeven is slightly less than its current share price.
Faraday is a developer of electric vehicles (EVs). It plans to open its 1.1 million square foot California production facility this month, with its FF91 luxury vehicle production to begin in the second half of 2022. It expects to produce between 6,000 and 8,000 in 2023.
The following two vehicles after that -- FF81 and FF71 -- will be built at its manufacturing partner’s South Korean facility. It’s also looking to make some vehicles in China.
FFIE stock has gained more than 186% in the past month after CEO Carsten Breitfeld said Faraday wouldn’t need any more funding to begin production of its flagship product. However, it will need to hit up the capital markets between now and the rest of the year to fund its plans for 2023 and beyond.
Faraday has the highest risk and reward of the three stocks. That makes its call option the most intriguing as well.
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