Merrill trashes cnc
(ML)CONSECO INC.:Less Risk, but No Earnings Visibility
10/3/0 10:12 (New York)
Merrill Lynch (E.Spehar (1) 212 449-4245) CNC
ML++ML++ML Merrill Lynch Global Securities Research ML++ML++ML
CONSECO INC. (CNC/NYSE)
Less Risk, but No Earnings Visibility
Edward Spehar (1) 212 449-4245
NEUTRAL* Long Term: NEUTRAL
Reason for Report: Company Update
Investment Highlights:
o We remain cautious about the prospects for Conseco, as it is difficult to
assess normalized earnings power.
o However, recent developments suggest that financial stability is less of
an issue.
o We are maintaining our Neutral (3) rating.
Fundamental Highlights:
o Conseco successfully renegotiated its bank credit agreement, averting a
potential liquidity crisis.
o The company has established a detailed plan for meeting both bank and
public debt obligations over the next two years.
o To improve cash flow, the company will slow the growth of the finance
operation.
o The discontinuation of the company's major medical business is not a
surprise given the lack of strategic fit and unacceptable loss ratios.
Earnings Outlook Still Unclear
Despite the incremental information, earnings continue to be a source of
substantial risk, in our view. Therefore, we have limited confidence in our
2001 estimate of $1.00 per share. Perhaps the greatest risk in the core
insurance business relates to the company's financial strength ratings.
Conseco acknowledges some negative impact from ratings downgrades, but suggests
that business activity has bottomed. We are not willing to make this
assumption. It is clear, however, that a sense of urgency surrounds the
initiatives to improve ratings and some components of the newly negotiated bank
agreement depend on a rating upgrade by 3/31/01. For the finance company,
impairment charges have almost completely eliminated earnings for the past two
and a half years, so determining a normalized return on assets is a
challenge |
