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Lehman analysts like IKON Office Solutions convertible as alternative to stock
Nashville, April 6 - IKON Office Solutions Inc. stock was downgraded Tuesday by Lehman Brothers, but the firm's convertible analysts said the company's convertible is an attractive alternative to the stock.
Following the downgrade of IKON shares to equal-weight, the firm's convertible analysts noted that the IKON 5% convertible due 2007 (Ba2) is an attractive swap relative to the stock, with 334 basis points of income pickup versus the common stock. The convertible has a current yield of 4.59% compared to the common stock dividend yield of 1.25%.
The convertible was trading at 109 with the stock at $12.75, which the analysts estimate is around 0.5% cheap using reasonably conservative assumptions. The option-adjusted spread on the convert at 386 basis points is attractive relative to the Lehman High Yield Ba-rated bond index average option-adjusted spread of 211 basis points.
Premium on the security is relatively modest at 28.5%, allowing for decent equity participation should the stock outperform Lehman's expectations.
The convertible is trading just 11.1% above its estimated bond floor of 98.11%, the analysts said, making it defensive on the downside. And, the short three-year maturity also bolsters its defensive attributes.
With more than one year of call protection left, near-term call risk is limited, too. The convertible is callable in May 2005 at 102.
On an implied volatility basis the convert also looks attractive, the analysts said, with a volatility of 28.4% versus its 100-day realized volatility of 42.6%. Listed options trade in the 31.5% to 36% implied volatility range.
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