Bear Stearns: Buy Anthem mandatory on strong equity participation

By Ronda Fears

Nashville, Tenn., Aug. 6 - After strong earnings from Anthem Inc., Bear Stearns & Co. convertible analysts are recommending the mandatory for strong equity participation in one of the most compelling fundamental names in the insurance sector.

"The company released strong earnings yesterday of $0.99 for the quarter, up $32% from the same quarter last year, and beat our equity analysts estimates by $0.01," said Bear Stearns convertible analysts in a report Tuesday.

"We are placing a buy on the Anthem $3.00 mandatory due 11/15/2004. The equity story is compelling and we feel Anthem's business has strong growth potential in a robust market. The mandatory issue will provide strong participation on the upside and the current yield offers an attractive income component for outright investors."

According to John Rex, Bear Stearns healthcare services analyst: "We view the company as possessing among the most compelling fundamentals in the sector, differentiated by dominant regional market share, margin expansion opportunities, and organic growth rates well in excess of industry averages."

The debt to capital ratio stood at 26.9% at the end of the second quarter, down from 27.8% at March 31. The fact that this ratio decreased is notable, Hempel said, especially since Anthem issued about $950 million in medium-term notes in the last quarter. Cash in the bank increased by a sizable $248.5 million sequentially to $4.67 billion at June 30 and debt levels at the end of the quarter were consistent with the prior quarter. Anthem now has around $1.8 billion in long-term debt on the balance sheet.

The mandatory issue is has a breakeven period of 2.11 years, which is less than the maturity of the issue in 2.25 years.

"This is currently one of very few mandatories in which you can recoup the premium before the convertible matures," the convertible analysts said.

"Since the mandatory is deep in the money, we should see strong equity participation in the upside along with an attractive current yield of 3.90%. The equity story is compelling and we feel Anthem's business has strong growth potential in a robust market, as well as a solid credit picture. The mandatory issue will provide strong participation on the upside and the current yield offers an attractive income component for outright investors."

Anthem shares traded off 10% after the earnings release, which the analysts said was probably due to expectations that the company would raise future earnings estimates more than they actually did.

Anthem Inc. Mandatory due 2004

Price $77.00

Common: $61.15

Conversion Premium: 9.19%

Current Yield 3.90%

Upper Conversion Price: $43.92

Lower Conversion Price: $36.00

Market Delta: 88%

100-Day Vol.: 48%

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