Merrill adds Sonic Automotive convert, removes Cendant from portfolio

By Ronda Fears

Nashville, Feb. 10 - Merrill Lynch's convertible research department added Sonic Automotive Inc.'s issue and removed Cendant Corp.'s mandatory and 0% due May 2021 from its model portfolio.

"We believe that the Sonic Automotive issue represents an opportunity for investors to take a position in a stable cash flow business with ample liquidity even after factoring in a slowdown in automobile promotional incentives and new car sales," said Merrill convertible analysts in a report Monday.

The Sonic Automotive 5.25% convertible due 2009 was added as a total return alternative.

"The issue is an attractive trade for outright investors or as a swap idea - out of the high yield paper," the analysts said.

"The yield of the 11% senior subordinated notes and the convertible are comparable, however we view the convert as having a more attractive long term upside potential."

Sonic Automotive has sufficient liquidity under its revolving credit facility with $280 million, the analysts said, adding that the company is expected to be free cash flow positive, barring any large-scale acquisition.

Given concerns over the pressures on demand for new vehicles along with continued pressures on used vehicle pricing and margins, Merrill equity analyst Douglas Neviera lowered his estimates on Sonic Automotive in December, putting fiscal 2002 earnings at $2.44 per share and fiscal 2003 EPS at $2.60, the convertible analysts noted.

The Cendant issues were removed, the convertible analysts said, because Merrill's equity research coverage of the company is under review.

The Cendant 0% due May 2021 had been a yield alternative. The mandatory had been a total return alternative.

Sonic Automotive 5.25% due 2009

Price: 79.50

Stock price: $15.60

Premium: 138.83%

Current yield: 6.6%

Yield to maturity: 9.70%

Call: May 2005 at 103

Yield to next call: 18%

Conversion ratio: 21.3379

Ratings: B3/B+

Theoretical value: 80.01

Note: Prices as of Feb. 5

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