Nashville, April 11 - Merrill Lynch & Co. convertible analyst Marc Malloy said in a report Friday that the GTech Holdings Corp. convertible has been removed from the firm's recommended portfolio due to a downgrade in the common stock.
The 1.75% convertible due 2021 had been recommended as a total return investment. It was added to the recommended portfolio in August 2002 at 102.63 when the stock was trading at $20.38. The issue closed Thursday at 149.88 and the common stock at $36.24.
David W. Anders, Merrill Lynch gaming equity analyst, downgraded the stock partly due to valuation.
Positive for GTech, Anders said, is that management has done an outstanding job over the last three years of renewing large contracts, cutting costs, making selected acquisitions to position the company for growth and repurchasing shares with free cash flow.
GTech also has started to benefit from the turnaround in lottery revenue growth after stagnating in the late 1990s.
Yet, Anders said, the stock valuation has expanded meaningfully and now captures much of the good news. Also, he said there are lingering concerns pertaining to the pricing of recently renewed contracts and what those ultimately mean for earnings when they kick in later this year.
In addition, the analyst noted that some of the improvement in gross margins has been the result of declining depreciation expenses as contracts aged, a trend which is likely to reverse given the large number of new contracts the company has been awarded in recent years.
GTech 1.75% convertible due 2021
Price: 149.88
Stock price: 36.24
Theoretical value: 148.67
Parity: 131.78
| Percent premium: | 13.73%
|
| Payback period: | 10.3 years
|
| Current yield: | 1.17%
|
| Yield to maturity: | -0.74%
|
| Call: | Dec. 20, 2006 at 100
|
| Yield to next call: | -9.25%
|
| Put: | Dec. 15, 2004 at 100
|
| Yield to put: | -21.29%
|
| Conversion ratio: | 36.3636
|
| Ratings: | | BBB/Baa1
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