By Ronda Fears
Nashville, Tenn., Oct. 10 - Rao Aisola, head of convertible research at Bear Stearns & Co., recommends Kohl's Corp.'s convertible for outright and hedged investors, noting that the bonds were very well insulated from the decline in the stock Thursday on lower same-store sales.
Kohl's reported a 3.2% decline in September same-store sales and that sparked a sell-off in the stock, which closed down $5 to $49.45.
In fact, Aisola sees the current dip in retail issues as an entry point, which is what accounts for the move in the convert Thursday compared to the common.
The 0% convertible due 2020 (BBB+/Baa1) added 0.75 point to 63.125 bid, 63.625 asked. Aisola said the convert dipped about 1 point in response to the huge stock hit, then buyers stepped in and it moved up.
"That's why we're recommending this issue," Aisola said.
"The stock sold off and the bonds barely moved."
He recommends the convertible for outright investors and also to hedged investors on a light 25% hedge versus the market hedge of 75%.
The issue was added to the Bear Stearns convertibles focus list.
"We feel that the current rout in retail offers a very attractive entry point into a name that has 20% top line growth, a 20-25% EPS growth and one of the most consistent execution stories in the retail space," Aisola said in a recent report.
"We continue to believe that retails names, going into the fall, face increased volatility for a myriad of reasons. This seasonal pattern is primarily driven by expectations of a bad fall season, a weak Christmas or what have you.
"Events of the recent past, such as the longshoremen's strike in California add to the fear index. We believe that such exogenous events, improbable as they may be, do not have any material long term impact and give investors the ability to position themselves in attractive and dynamic companies, albeit at modest valuations."
Kohl's, one of the high fliers in the retail industry until recently, has sold off on fears the stock is overvalued and the longshoremen's strike will impact them unevenly given their import mix (35%) from the far-east, he said.
Kohl's is also one of the few growth stories with a believable 20% growth story, given its lack of penetration into major urban centers such as Los Angeles where it plans to launch perhaps as many as 20 stores in 2003, he added.
Moreover, the Kohl's 0% convertible subordinated notes offer a defensive posture with an investment-grade rating.
While the notes do not offer a current yield, they offer modest equity participation on the upside while solidly protecting the downside. With a put less than nine months away at 62.857, the investor is well protected in the event of a further market meltdown, he said.
On the valuation front, using volatility of 40% and a credit spread of 150 basis points, fair value is 66.1, which puts the issue trading 4.7% cheap. While the theoretical delta of 37% indicates a very modest equity participation, he said the actual delta on the way up is more in the 40-55% range, depending on the stock price.
For the hedge investor, he suggests a 25% hedge as a bullish stance on the common.
Kohl's convert is the earliest maturing paper in its debt structure and Aisola sees no issues with the company's credit or liquidity.
Kohl's 0% convertible due 2020
| Price: | 63.125
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| Common price: | $55
|
| Premium: | 80.93%
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| Delta: | 37%
|
| Put: | June 12, 2003
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| Put price: | 62.857
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