New York, Aug. 9 - Bear, Stearns & Co. convertibles analysts are recommending Brinker International's 0% convertible senior debentures due October 2021 as offering an attractive risk-reward ratio in a defensive sector.
Although the security is close to fair valuation, its short-term put offers downside protection while on the upside it has high equity sensitivity, unlike many other zero-coupon issues, the analysts noted.
The recommendation, in a report from Rao Aisola, Sarah Gallagher and Matt Hempel, takes the form of a reiteration of Bear Stearns' outstanding buy recommendation on the convertible.
Thanks to the put in October 2003, a 38% downward move in the common stock would cause only an 8% loss in the convertible, the analysts said.
Meanwhile, the securities would participate in 70% of a 38% gain in the stock.
The 38% gain is the level that would take the stock up to the $39 price target of Bear Stearns restaurant analyst Joe Buckley. Brinker stock closed at $28.05 on Thursday.
Buckley has a buy rating on Brinker.
Brinker recently released fourth quarter earnings which beat analysts' estimates by a penny. But the stock traded down 8% as the July same-store sales were softer than expected.
"We believe the softness on the July data point was overdone," Buckley says.
Bear Stearns also sees Brinker as being conservative with its guidance, looking for same store sales growth of 0% to 2% compared to competitors' 2% to 5%.
Aisola, Gallagher and Hempel said Brinker's convertible is currently trading in line with similar credits and maturities, yielding 2.5% to maturity with a conversion premium of 24.1%.
From a credit standpoint, Brinker has total debt to EBITDA of 1.31 times, a cash flow from operations to debt ratio of 0.68 times and a debt leverage ratio of 33%, the analysts said.
Brinker International 0% convertible senior debentures due Oct. 10, 2021
| Price: | 63.5 with stock at $28.30
|
| Current yield: | 0%
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| Yield to maturity: | 2.38%
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| Put price: | 61.163
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| Years to put: | 1.25
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| Conversion premium: | 24.11%
|
| Conversion price: | 32.031
|
| Delta: | 55%
|
| 100-day volatility: | 28%
|
| Spread: | 400 basis points over Treasuries
|
| Ratings: | Baa2/BBB
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