Shares of Rite Aid, the third-largest U.S. drugstore chain, rose after an analyst raised his price target due to expected synergies from a planned acquisition.
Credit Suisse analyst Ed Kelly raised his target price on the shares to $6.50 from $5.50 and said that the increase was not a call on third-quarter results, which are due on Thursday.
Kelly, in a research note, said that the raised stock price expectations stem from results he expects to see from Rite Aid's planned acquisition of the Eckerd and Brooks chains from Canada's Jean Coutu.
"Our proprietary analysis indicates that Eckerd/Brooks synergies could exceed $300 million, well above management's guidance of $150 million," he wrote.
When it announced the deal in August, Rite Aid said it would benefit from having greater heft, and would save money in merchandising, purchasing, advertising, distribution and administrative expenses. The company expected to see $150 million in net synergies after the first 12 months following the closing of the deal.
Kelly said that he believes Rite Aid "was conservative in most areas it highlighted ... overestimated negative synergies related to store divestitures, and simply excluded other visible opportunities."
Kelly estimated that each $50 million in additional synergies is worth 8% to 10% to the stock price and said that Rite Aid may raise its synergy target as the closing of the deal nears.
Kelly said that he ultimately sees the shares trading at $8 to $9 within two to three years.
Rite Aid shareholders are set to vote on the plan next month.