In mid-June we teed up a covered call trade idea on Lantheus Holdings, Inc. (LNTH) . The stock at the time was trading at just a tad over sixty bucks a share. I recommended the November $60 call strikes for this simple option strategy.
The shares now trade almost exactly to where they were then, which means that trade provided a just over 20% return, even as the equity has traded completely sideways since then. As my late father like to quip, "If it ain't broke, don't fix it."
Therefore, we are going to go for a "rinse, wash, and repeat" trade on Lantheus using a similar strategy. This is one of the myriad things I like about covered calls, sometimes one can make the same profitable trade over and over again.
Lantheus continues to deliver stellar revenue growth thanks to the recent launch of its cancer imaging agent Pylarify, which has quickly accounted for nearly 60% of the company's overall sales. Lantheus saw better than 130% sales growth within its third quarter results, which came out a month ago. This easily beat expectations. Definity, the company's ultrasound contrast agent, has around 80% market share and is producing sales of approximately $60 million a quarter and is seeing revenue growth in the mid-single digits.
Management also hiked both fiscal 2022 earnings and revenue forecasts significantly a month ago. Despite this, the stock slumped on the earnings release as Pylarify only posted 10% sequential sales growth from the second quarter. That pullback provides another solid entry point for our covered call strategy. The shares trade at approximately 16 times this year's expected profits. The company had free cash flow of $87.5 million in the third quarter. At that run rate, LNTH has a free cash flow yield in the high single digits.
Now, sales growth should slow in fiscal 2023 to the low to mid-teens. The company also recently picked up a couple of promising radiopharmaceutical cancer drug candidates to build out its pipeline. Since third quarter results came out, four analyst firms including Mizuho Securities have reiterated Buy ratings on the stock. Price targets proffered range from $102 to $120 a share. Therefore, it seems time once again to set a nice trade in LNTH.
This is how one can execute a covered call position in LNTH. Using the July $60 calls, fashion a covered call order with a net debit in the $49.00 to $49.25 range (net stock price - option premium). This strategy provides downside protection of nearly 20% and just over 20% of potential upside over the option duration of approximately seven and a half months even if the stock does nothing once again.