2 Quality Turnaround Bond Plays

08/01/2012 8:15 am EST

Focus: BONDS

Marilyn Cohen

President & CEO, Envision Capital Management, Inc.

When looking for investment-grade bonds, these companies may not be on your radar screen...but they should be, writes Marilyn Cohen of Bond Smart Investor.

Bio-Rad Laboratories (BIO)
There are a lot of timid analysts tiptoeing around the ancillary medical service, monitoring, and diagnostic lab arena. But with interest rates (and that’s all rates) at generational lows, we’ve got to tiptoe as close to 4% yields as we can find. That isn’t easy.

Multinational companies will all have some back splash from the Eurozone crisis. Trying to minimize that back splash is part of our job.

We’ve been in and out of the medical diagnostic area with newsletter recommendations over the years. We’ve never had to make a sell recommendation there—bonds either were called or matured. And that is the most probable outcome with Bio-Rad Labs bonds.

Bio-Rad Laboratories manufactures and distributes life science research products, diagnostics, and instrumentation equipment. Their niche is the life science research and diagnostic market. Their clients are easy to guess: Universities, research institutes, hospitals, big pharma, and biotech companies.

Bio-Rad is globally diversified, and over the years has been acquiring smaller companies that complement its existing technologies. Bio-Rad’s business focuses on two areas: Clinical diagnostics (testing and equipment for disease diagnosis), accounting for ap­proximately 66% of 2011 sales, and Life Sciences (products and equipment that analyze chemicals), which brought the other 34%.

This bond idea isn’t exciting, and there will be some hiccups due to the European slowdown. Nevertheless, Bio-Rad Labs, with $2.5 billion in estimated 2012 sales, total debt at $731 million, a $2.9 billion market cap, good cash flow, and no dividend payouts, should be fine.

Although the Senior Unse­cured bonds carry a split rating, we think they fit nicely into the lower rung of investment grade.

The Bio-Rad 4.875% bond due December 15, 2020 (CUSIP 090572AP3) is non-callable. Rated Ba1 by Moody's and BBB by S&P, the bond carries a 3.99% yield to maturity.

AIG (AIG)
It’s true. AIG’s collapse, if not rescued by the US Treasury, would have brought down the entire financial system.

But that was then and things have changed. In April of this year, we recommended buying AIG 3.8% bonds due March 22, 2017. We now reiterate that buy recommendation. The reasons are simple.

The company purchased $3 billion worth of its shares from the Treasury in March. Then again in May, as the Treasury continued its selling program, AIG purchased another $2 billion of its shares. AIG has paid down the Treasury’s preferred shares.

With liquidity up and less important subsidiaries sold, AIG is doing a fine job with its makeover. Soon, the reinvented and streamlined AIG will be more understandable and much simpler to follow. We reiterate our buy on AIG bonds.

The AIG 3.8% bonds due March 22, 2017 (CUSIP: 026874CS4) are callable. Rated Baa1 by Moody's and A- by S&P, they carry a 3.16% yield to maturity.

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