Deutsche analysts say Lowe's 0% convertible could benefit from run-up in stock

By Ronda Fears

Nashville, Tenn., Dec. 5 - The Lowe's Cos. Inc. zero-coupon convertible due 2021 could benefit from a further run-up in the underlying stock, as it is more equity sensitive than the Lowe's 0.861% discount convertible due 2021, said Deutsche Banc Alex. Brown convertible analysts Jeremy Howard and Jonathan Cohen in a report Wednesday.

At Tuesday's close, the Lowe's 0% convertible was offered at 82.913 versus a closing stock price of $5.52, the analysts said, and the issue exhibits good equity sensitivity with a premium of 10.5% and a delta of 74%. The bond also has high credit quality, with A3/A ratings, and a liquid bid for the credit, the analysts added.

The 0% convert has a higher level of equity sensitivity than the Lowe's 0.861% convert with a 74% delta versus a 62% delta for the discount issue. If the stock rises to the Deutsche Banc target of $50 in six months time, the analysts said, "the theoretical value of the bond will rise by 8.8%, capturing the majority of the nearly 11% rise in the underlying stock. While both the underlying equity and the bond have performed well to date, we believe there is room for additional upside in this (0%) bond."

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