By Ronda Fears
Nashville, June 26 - The Roche 0% convertible due 2021 offers a chance to pick up some cheap volatility, said Deutsche Bank Securities analysts in a report Thursday.
"Roche has recently enjoyed a rally, outperforming not only its own sector but also the wider market," said Deutsche convertible analysts Robert Barron, Clodagh Muldoon and Bruno Gargiulo.
"The 'cleaning up' of Roche's financial income line and, more importantly, the string of positive pipeline news has had a huge impact on the share price and leaves us much more confident that Roche can outpace drug industry sales and EPS over the next five years."
Roche shares are up 7.9% over the trailing month, compared to the Dow Jones healthcare index decline of 2%. It is up 11.1% over the trailing 12 months, versus a 3.3% gain in the Down Jones healthcare index.
Deutsche recently upgraded Roche stock to a buy, the analysts noted.
Roche has a 60% holding in the U.S. biotech firm Genentech and newsflow on that company has played no small part in Roche's share price performance, the anlaysts said. Over the past month, Genentech has had a good deal of positive press with regard to drugs such as Avastin and Xolair.
Deutsche also has a buy recommendation on Genentech shares, the analysts noted.
"Genentech is a much more volatile stock than Roche and with recent events this volatility has surged," the analysts said.
"We believe that given Roche's substantial holding in Genentech there is potential for this increased volatility to translate into an uplift in Roche's stock vol."
Also, the analysts think the Roche 0% due 2021, on a premium of 41.16%, is the most likely of the Roche convertible family to benefit from any increase in volatility. The company has other convertibles in play, including one that exchanges into Genentech shares.
Recently, in the European convertible universe, there have been sellers of volatility, the analysts noted, and the Roche 0% due 2021 has been no exception.
"We believe that investors should view this fall off in the [convertible implied volatility] as a buying opportunity, ahead of a pick up in volatility driven by Genentech - and even Roche - newsflow," the analysts said.
Roche/Genentech 0% due 2021
| Ask: | 57.85
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| Parity: | 41.16
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| Premium: | 40.56%
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| Bond floor: | 54.25
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| Delta: | 34.48%
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| Stock Vol: | 26%
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| Credit spread: | 45 bps over Libor
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| Put: | Jan. 25, 2005
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| Put price: | 55.279
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| Call: | July 25, 2007
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| Call price: | 60.47
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