By Ronda Fears
Nashville, March 4 - Teva Pharmaceuticals has a strong equity story and Deutsche Bank Securities Inc. convertible analysts believe the best way to play the converts is the newest 0.375% issue for outrights. They suggest outright holders of the Teva 0.75% convert should consider switching into the 0.375%.
Arbs may be playing the Teva 1.5% convert for its short-dated put coming up in October but it is trading rich, the analysts added in a report Tuesday.
Teva's recent earnings performance confirmed that its growth story is very much on track, and the convertible analysts noted Deutsche equity analyst David M. Steinberg upped his revenue forecast for Teva, citing an exceptionally strong product pipeline.
The Teva 0.375% convertible due 2022 has comfortably the best profile for outright investors, said analysts Jeremy Howard, Jonathan Cohen, Robert Barron and Jonathan Poole in the report. Least attractive, from an outright perspective, is the 1.5% due 2005.
Arbitrage investors may be bidding up the price of the Teva 1.5% issue, the analysts said, because it has the best gamma profile but an implied volatility of 40.5% versus 31.9% on the 0.375% issue does not suggest good value at current levels.
"For investors looking for the best asymmetric risk/return over one year, it is clear, to us, that TEVA 0.375% 2022 is superior to the other two convertibles," the analysts said.
"Because it has much longer hard call protection and a longer dated put, it is much more equity-like. But the upside equity sensitivity is balanced by good downside protection."
The Teva 0.75% due 2021 "is surprisingly dull for all but very large stock moves," the analysts said, because the put/call in December 2004 stunts upside participation.
The analysts did not go into a full credit analysis but noted that Teva's BBB- rating is stable, the debt maturity schedule is not onerous, liquidity is strong as well as cash flow and capitalization shows moderate debt leverage.
Also the analysts noted that there are no differences between the three bonds in terms of subordination; all are senior unsecured obligations.
Teva 0.375% convertible due 2022
| Ask: | 107.68
|
| Stock price: | $37.85
|
| Parity: | 88.23
|
| Bond floor: | 82.37
|
| Premium: | 22.04%
|
| Conversion price: | $42.90
|
| Conversion ratio: | 23.3106
|
| Contingent conversion: | 120%
|
| Current yield: | 0.348%
|
| Yield to put: | -1.209%
|
| Put: | Nov. 18, 2007 at par
|
| Theoretical value: | 109.72
|
| Stock volatility: | 35%
|
| Credit spread: | 155 bps over Libor
|
| Implied volatility: | 31.9%
|
| + 25% stock move: | 59.1%
|
| - 25% stock move: | 37.8%
|
| + 50% stock move: | 61.2%
|
| - 50% stock move: | 31.6%
|
|
|
| Teva 0.75% convertible due 2021
|
| Ask: | 108.45
|
| Stock price: | $37.85
|
| Parity: | 88.204
|
| Bond floor: | 96.489
|
| Premium: | 22.95%
|
| Conversion price: | $42.91
|
| Conversion ratio: | 23.3036
|
| Contingent conversion: | 120%
|
| Current yield: | 0.692%
|
| Yield to put: | -4.792%
|
| Put: | Aug. 20, 2004 at par
|
| Theoretical value: | 107.845
|
| Stock volatility: | 35%
|
| Credit spread: | 165 bps over Libor
|
| Implied volatility: | 36.43%
|
| + 25% stock move: | 27.9%
|
| - 25% stock move: | 27.7%
|
| + 50% stock move: | 46%
|
| - 50% stock move: | 14.5%
|
|
|
| Teva 1.50% convertible due 2005
|
| Ask: | 108.35
|
| Stock price: | $37.85
|
| Parity: | 87.787
|
| Bond floor: | 102.034
|
| Premium: | 23.42%
|
| Conversion price: | $43.12
|
| Conversion ratio: | 23.1934
|
| Contingent conversion: | None
|
| Current yield: | 1.384
|
| Yield to put: | -6.759%
|
| Put: | Oct. 15, 2003 at 100.38
|
| Theoretical value: | 106.89
|
| Stock volatility: | 35%
|
| Credit spread: | 165 bps over Libor
|
| Implied volatility: | 40.5%
|
| + 25% stock move: | 11.9%
|
| - 25% stock move: | 26.3%
|
| + 50% stock move: | 41.8%
|
| - 50% stock move: | 15.5%
|
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