By Ronda Fears
Nashville, Sept. 24 - Merrill Lynch & Co. added Omnicare Inc.'s 4% convertible preferred to its recommended portfolio, citing a significant yield advantage to the stock as well as exposure to a solid credit in a stable industry.
Omnicare is the leading provider of pharmacy services in the U.S. to the institutionalized elderly.
Convertible analyst Marc Malloy said the issue also has an attractive risk/reward profile, solid call protection until June 15, 2009, and is trading at a 0.5% discount to theoretical fair value.
Over a one-year horizon, the convertible is estimated to return approximately +18.4/-14.4% for a 25% move in the underlying common stock. At 53 with the stock at $33.57, the convert offers a yield advantage of 350 basis points above the common, which pays a quarterly dividend of 0.225c.
Omnicare issued the convertible in June using the preferred income equity redeemable securities or PIERS structure. Distributions are deferrable for up to 20 consecutive quarters. If dividends are deferred, however, the company is restricted from paying dividends to common shareholders.
Malloy's report also noted that Merrill's medical specialty research group, headed by A. J. Rice, recently reinstated coverage of Omnicare with a buy on the stock and a price target of $42.
Recently, Merrill analysts said, Omnicare completed several acquisitions that have cemented its industry leadership position and created the potential for strong earnings momentum over the intermediate term. The company provides pharmacy services to more than 50% of nursing home occupants in the U.S.
In recent months, the report also noted, Medicare program administrators have moved to boost reimbursement for nursing homes, with payment increases slated to take effect Oct. 1, and that should improve the financial strength of Omnicare's principal customers.
Next year, Merrill estimates Omnicare should post EPS growth of better than 30%, as a result of the recent acquisitions. Longer-term, the firm pegs Omnicare's long-term EPS growth rate at around 15%.
Omnicare 4% preferred due 2033
Price: 53
Stock price: $33.57
Parity: 41.12
| Premium: | 28.9%
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| Current yield: | 3.77%
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| Call: | June 2009 at 50
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| Yield to call: | 2.86%
|
| Stock yield: | 0.268%
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| Conversion ratio: | 1.2248
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| Investment value: | 26.45
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| Investment premium: | 100.36%
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| Delta: | 0.664
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| Theoretical fair value: | 53.28
|
| Volatility cap: | | 35%
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| Credit spread: | 358 basis points over five-year Treasury
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| Ratings: | S&P: BB
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| Moody's: Ba3
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| Note: Prices as of Sept. 22 close.
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