Deutsche takes defensive stance for Lowe's, says switch out of 0% into 0.861%

By Ronda Fears

Nashville, Tenn., March 5 - With the runup in Lowe's Cos. stock since the retailer posted strong results last week, Deutsche Banc Alex. Brown convertible analysts suggest a more defensive stance with regard to the bonds. Thus, the analysts recommend switching out of the 0% convert due 2021 into the discount 0.861% convert due 2021 for more protection and a superior risk/return profile.

"Although Deutsche Bank retains a strong buy recommendation on the Lowe's stock, we feel that many investors were awaiting the Feb. 25 results before deciding how to play the rest of the year," said analysts Jeremy Howard and Jonathan Cohen in the report Tuesday.

"The results were strong, and we increased fiscal 2002 EPS estimates from $1.51 to $1.58, but following such a strong stock run, we are inclined to assume a more defensive stance for the bonds. As such, we are switching from the 0% 2021 to the 0.861% 2021 in our U.S. Recommended List."

Lowe's stock has gained a whopping 61% since Sept. 21 to Monday's closing at $43.30, the analysts noted.

The risk/return profile is better on the 0.861% issue, the analysts said, noting the 0% bond will participate with about 61% of the upside and 65% of the downside for a 25% plus or minus move in the stock, and also has a yield disadvantage to the stock.

Given a 25% plus or minus move in the stock over one year, the analysts estimate that the 0.861% issue will participate in 57% of the upside and only 36% of the downside.

In implied volatility terms, the 0.861% bond is 3.15 points cheaper at 37.51% versus 40.66% on the 0%, the analysts said.

With a premium of 27.05%, the 0.861% bond has a more defensive profile than the 0% bond with a 11.05% premium, the analysts added.

There is more hard call protection on the discount issue, too. The 0% has hard call protection to Feb. 16, 2004, whereas the 0.861% has hard call protection through Oct. 19, 2006. And, the analysts noted, both issues are senior unsecured and "as far as we can see, there should be no difference in the credit market's treatment of them." Both are rated A3/A and fairly comparable in size with reasonable liquidity. The 0% is a $ 611 million issue and the 0.861% is a $500 million issue.

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