Salomon says Four Seasons convertible a good alternative to the stock

By Ronda Fears

Nashville, Tenn., Dec. 3 - Four Seasons Hotels Inc. stock is not expected to see much upside potential in the coming year as the company works through what is likely to be a protracted slump in the travel sector, but Salomon Smith Barney convertible analysts said the company's zero-coupon convertible bonds are a good way to pick up a steady return and is a good alternative to the common shares.

"Given the fact that we're not expecting much in the way of returns from Four Seasons common over the coming months, we think that the convertible bonds make a worthwhile alternative to the underlying shares. That said, the Four Seasons convertible bonds would provide holders with a decent - if relatively modest - annual return of 4.3% out to the put date in September of 2004. The put is payable in cash or stock at the option of the company," said Salomon convertible analyst Stuart Novick in a report Monday

"Also, we think the bonds should hold up fairly well if the shares were to give back some of their recent gains. The company's balance sheet looks to be in relatively good shape with ample cash and borrowing capacity, not too much leverage and capital spending requirements that, while considerable, may leave management with some wiggle room. We also believe that should things become far worse than management presently forecasts, the Four Seasons name does possess a significant amount of brand equity, possibly making the company an attractive takeover target.

"Hedgers should consider that these bonds, like the zeros of a number of other issuers, represent a negative financing trade in that the shorted common has a higher cash payout than do the bonds. Nevertheless, we think that overall the Four Seasons zeros make for a good paid to wait situation, we think."

Four Seasons Hotel's shares have regained some of the ground lost after the Sept. 11 terrorist attacks. The stock had drifted lower prior to Sept. 11 as signs of a slowing economy raised concerns about Four Seasons' ability to hold the line on revenues and earnings, after topping out in mid-May at roughly $65 per share, easing down to the mid-$40's just before to the attacks. When the market reopened, the stock was understandably trounced as investors fled travel-related issues. In the first few sessions of trading after Sept. 11, Four Seasons lost another third of its value, breaking just above $30. Since then, however, the shares have picked up, advancing to a recent $42, with some investors apparently believing that the worst may be over for the sector.

While fears of the company's immediate demise seem unfounded, given support from the company's relatively sound financial condition, if nothing else, there is likely to be more earnings weakness ahead, Novick said. When management released third quarter results in mid-November, they also provided guidance for the period through the end of next year and the outlook was not particularly encouraging.

Four Seasons now expects current quarter revenues per available room (RevPAR) to fall by about one third versus a year ago due to lower occupancy levels, putting full year RevPAR down by 12% to 13%. Looking further ahead, management sees RevPAR slipping marginally - flat to down 5% - in 2002, with the brunt of the shortfall coming in the first half of the year.

Given these developments, Salomon Smith Barney slashed its 2001 earnings outlook for Four Seasons from $1.64 per share to $1.36 per share. For next year, the EPS estimate goes from $1.18 to 77c with a 12-month share price target of $40, suggesting the stock has gotten somewhat ahead of itself. Despite the positive long-term assessment of Four Seasons' brand equity and present financial strength, Novick noted that Salomon Smith Barney believes that near-term performance remains clouded.

A positive factor, Novick said, is that Four Seasons recently paid down a big chunk of its debt. The company redeemed the entire $100 million issue (face) of 6% bonds, which was set to mature next July, at 102.12. That leaves only the 0% convertible bond for the company's long-term debt. Cash, post the debt retirement, would be about $234 million, he said, and Four Seasons also has bank line availability of $200 million, although the two lines that comprise the full amount are set to expire next year. Leverage declined to an estimated 27% from the 33% ratio at the end of the September quarter.

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