By Ronda Fears
Nashville, Tenn., June 20 - To play a strong cyclical name that will benefit in the economic recovery, Rao Aisola, head of convertible research at Bear Stearns & Co., recommends the convertible of microchip maker Vishay Intertechnology Inc.
Bear Stearns recommends outright investors buy the 5.75% due 2006 and arbitrage investors use a 60% delta hedge. The firm added that while Vishay is labeled as a semiconductor company it is more accurately a component supplier with a positive and stable cash flow.
"We are recommending the Vishay 5.75% notes for the outright investor given its dominant position in the component market as well as its well diversified revenue base," Aisola said in a report Thursday.
"For the swap investor, the notes represent a good cost of carry, inexpensive and realizable volatility and a believable bond floor."
Vishay reaffirmed June quarter guidance and is expecting sequential revenue growth of 3% to 5% with gross margins expected to come in in the 23 to 24% range, the analyst noted.
Bear Stearns semiconductor analyst Charles Boucher believes that Vishay's fundamentals continue to improve and its growth will be driven by its active component business which accounts for 60% of the revenue.
Some key investment positives include price stabilization, improving channel strength and backlog and a book-to-bill greater than one, the analyst said.
At a 2003 P/E ratio of 21.6 times and 2 times the Bear Stearns 2002 sales estimate, Boucher believes Vishay represents a buying opportunity. Bear Stearns has a price target of $36 on the stock.
The Vishay convertible, Aisola said, "in our opinion, represents an attractive way to invest in a cyclical company that will benefit from an economic upturn."
The notes are fairly valued, he said, but noted that the listed calls 2 years out are at a 48% implied volatility and equivalent historical volatility is at 64%.
The notes offer a current yield of 5.42% with a 28% conversion premium and are callable on Dec. 15, 2002.
"We believe that despite the early call, the notes offer fair upside for the outright investor at a reasonable option price," Aisola said.
"For the swap investor, the notes offer compelling value with a static return, close to 7%. On a 60% hedge the notes present an opportunity to realize a positive gamma given a stable credit outlook."
With a cash balance of $380 million, long-term debt at $557 million and no maturities for 2 years, the analyst foresees no liquidity issues for the firm.
Vishay 5.75% subordinated notes due 2006
| Convertible Price: | 106
|
| Conversion Premium: | 28%
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| Common Price: | $22.88
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| Conversion Price: | $27.62
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| Current Yield: | 5.42%
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| Spread: | 500 bps over Treasuries
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| Yield-to-Maturity: | 4.26%
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| Delta: | 50%
|
| 100-day volatility: | 46.96%
|
| Call Price: | 103.286
|
| Years to first call: | 0.5
|
| Credit Ratings: | Ba3
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