By Ronda Fears
Nashville, Sept. 24 - Merrill Lynch & Co. added Motorola Inc.'s 7% mandatory convertible to its recommended portfolio of convertibles, citing an attractive valuation that offers a high-yielding alternative to the stock.
Convertible analysts also noted that Merrill Lynch wireless telecom equipment analyst Tal Liani recently upgraded Motorola stock to a buy with a price target of $15.
Merrill convertible analyst Marc Malloy said the Motorola convertible is a high yielding equity alternative to the common due to its low conversion premium of 8.7% and delta of 0.76. He added that the convert has a current yield of 9.2%, translating into a yield advantage of 790 basis points over the common, which pays a 1.3% dividend.
Although the convertible has just over a year until it mandatorily converts, he said the high current yield adequately compensates an investor for the loss of conversion premium to the maturity date.
It also has an attractive risk/reward profile, Malloy said, estimating to produce a total return of +24.0%/-19.6% for a 25% move in the underlying stock over one year. Additionally, Merrill estimates the convert would return about 3.6%, versus 1.3% for the stock, if the stock remained at $12.06 until the mandatory conversion date on Nov. 16, 2004.
Liani said in the recent upgrade to Motorola stock that the CEO's announced departure reflects the board's desire to unlock hidden value as a new CEO could potentially better understand concerns such as profitable growth and streamlining operations.
The risk, Liani said, is that a new CEO could decide to continue the company's current strategy and, thus, value may not be unlocked.
Motorola 7% mandatory
Price: 37.92
Stock price: $12.06
Parity: 34.90
| Premium: | 8.65%
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| Current yield: | 9.23%
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| Stock yield: | 1.327%
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| Conversion ratio: | 2.3719/2.8935
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| Conversion price: | $17.28/$21.08
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| Investment value: | 4.31
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| Investment premium: | 780.28%
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| Delta: | 0.759
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| Theoretical fair value: | 37.19
|
| Volatility cap: | 50%
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| Credit spread: | 146 basis points over five-year Treasury
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| Ratings: | S&P: NR
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| Moody's: Baa2
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| Note: Prices as of Sept. 22 close.
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