Bear Stearns analyst recommends MetLife for outright investors

By Ronda Fears

Nashville, Tenn., Aug. 7 - Bear Stearns & Co. convertible analyst Sarah Gallagher recommends the MetLife 8% mandatory for outright investors, noting it offers a short maturity, a generous current yield and strong equity participation.

"For BBB+/A3 paper that matures in nine months, [the MetLife mandatory] offers an attractive current yield of 5.06%. With the convertible trading with a 4.25% premium, we would expect to see strong equity participation on the upside," the analyst said in a report Wednesday.

"Using a volatility of 30%, the convertible models out to be approximately 2 points cheap to where it is trading. The mandatory issue has a breakeven period of 0.95 years, which is just outside the maturity of the issue (0.95 years). This means that the conversion premium would only need to contract slightly (to 3.43%) to become one of the few mandatories in which an investor can recoup the premium before the convertible matures."

MetLife held its second quarter conference call and reduced guidance to $2.43-$2.53 from $2.53-$2.56 due to weak equity markets, Gallagher noted. Although Bear Stearns insurance analyst Andrew Kligerman expected a downward revision, he did expect a smaller change since MetLife is typically less equity-market sensitive than other companies within his industry, she said.

"The weak equity market is overshadowing healthy fundamentals, including strong life and annuity sales. Life insurance and annuity sales rose 33% and 42% versus the year-ago quarter, due to improved distribution post-September buying, new product introductions, and enhanced commission arrangements," Gallaher said.

"Kligerman currently has a buy rating on MetLife common. However, Kligerman is in the midst of revising his EPS estimates. That said, even if he were to revise his 2003 estimate to $2.60, the stock would still likely remain a buy with a price target of $32 per share."

MetLife 8% convertible

Price: $79.05

Common: $25.50

Upper Price: $16.815

Lower Price: $14.25

Current Yield: 5.06%

Upper Ratio: 2.9735

Lower Ratio: 3.5088

Ratings: BBB+/A3

Conversion Premium: 4.25%

Issue Price: $50.00

Breakeven: 0.95 years

Yield Pickup: 428 basis points

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