Lehman finds TJX convertible CoCo feature has only small dilutive impact on earnings

By Ronda Fears

Nashville, Feb. 26 - The TJX Cos. Inc. had a rocky morning in the stock market on the heels of reporting strong earnings, partly due to some uncertainty about the dilutive impact on earnings from the contingent conversion, or CoCo, feature on its convertible. Trading in the converts was light, however, with the zero-coupon issue little changed, traders said.

In mid afternoon, the TJX 0% convertible due 2021 was quoted at 85.625 bid, 86 offered with the underlying shares at $23.69.

Lehman Brothers convertible analysts said in a report Thursday that the CoCo feature would have very little affect on earnings for the off-price retailer.

"It is our understanding that the discussion of the dilutive impact of the convertible on TJX's 2004 earnings caused some confusion on the company's [Wednesday] earnings conference call," said Lehman convertible analysts in the report.

"Assuming the most conservative outcome (i.e., that the contingent conversion trigger is hit in each quarter of 2004), we estimate the CoCo feature will have only a $0.01 impact, or 0.78%, on Lehman's 2004 EPS estimate of $1.41."

If the CoCo trigger is not hit, there will be no impact, or dilution.

At the midpoint of a recent level of 85.875 bid, 86.25 offered for the bond with the common stock at $23.78, the yield to maturity is 0.89% and premium 10.78% with a delta of 67%. The yield to put is a negative 4.25%, as it is putable in February 2007 at 75.68. Face amount on the issue is $517.5 million; the put liability is estimated at $39.164 million.

The issue has a contingent conversion feature that effectively allows the company to delay recognition of the dilutive impact, if any, of its convertible. At issue, the CoCo trigger was set at 135% of the accreted conversion price of the bond, which declines by 0.3125% quarterly until it hits 110%.

The Lehman analysts estimate the CoCo trigger at the end of January was 131.25%. They estimated the 2004 contingent conversion stock trigger prices at $28.615 for first quarter, $28.688 for second quarter, $28.761 for third quarter and $28.693 fourth quarter.

Thus, estimated dilution was estimated at 0.35% for first quarter, 0.14% for second quarter, 1.14% for third quarter, 1.20% for fourth quarter and an overall total of 0.78% for 2004.

"As our analysis shows, we estimate a negligible impact on fiscal '04 earnings if the CoCo trigger is hit in each quarter of fiscal 2004 - the most conservative estimate of the earnings impact," the analysts said.

"Investors should note that currently TJX stock is 20.3% below the fiscal first quarter CoCo trigger of $28.615.

At current levels, the analysts said the TJX convert is fully valued, using a credit spread of 100 basis points over Treasuries and 26% volatility, and they continue to include it in the Lehman 2004 recommended convertible portfolio.

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