Morningstar Advisor - June/July 2010 - 37

Spotlight

Bonds We Like
By Haywood Kelly

To lessen risks, shop smartly. Our analysts have found several corporate bonds that offer good yields relative to their credit risk.

Today is a dicey time to be investing in bonds. Historically low yields and the threat of inflation and rising interest rates mean fixed-income investors could hit some very rough patches in the coming years. But bond investors can mitigate these risks by shopping smartly: picking bonds that offer a good yield for the credit risk taken on. To help bond investors sift through the corporate debt issues out there, Morningstar now rates the creditworthiness of individual companies and judges whether their bonds are good investments. Below are issuers our analysts have uncovered whose bonds offer attractive yields.

prospects. The medical-device make has made a steady stream of acquisitions over the past several years, but it has maintained a strong balance sheet throughout its history. The firm has generated $4.5 billion in free cash flow during the past seven years and spent about $1.9 billion on acquisitions. The remainder of cash flow has been used to buy back shares and repay debt. We think that future acquisitions will be small and not pressure Zimmer’s financial position. We expect the firm to cover its cash obligations 9.2 times through 2014, which is among the highest Cash-Flow Cushion ratios in our universe.
Investment Rationale

Morningstar Credit Rating Definitions
AAA AA A BBB BB B CCC CC C D Extremely low default risk Very low default risk Low default risk Moderate default risk Above-average default risk High default risk Currently very high default risk Currently extreme default risk Imminent payment default Payment default

Zimmer Holdings ZMH AA1
Business Risk Cash-Flow Cushion Solvency Score Distance to Default

Very Good

Background

Zimmer claims a leading market position in reconstructive devices, where it excels in knee and hip implants. Market share in this niche is sticky, because orthopedic surgeons display high levels of supplier loyalty.
Credit Rating Rationale

The company’s AA1 credit rating reflects our very favorable view of Zimmer and its

We think both of Zimmer’s outstanding bonds are trading at wider spreads versus Treasuries than the bonds of a company with its credit profile should be. Zimmer’s 2019 senior unsecured notes have recently traded close to A1 territory—a much wider spread than our AA1 credit rating would imply. We believe that Zimmer operates with a sustainable competitive advantage that should permit the firm the generate ample free cash flows well into the future. Given our positive view of its long-term cash-flow prospects and the company’s wide moat rating, we think Zimmer’s 2039 senior unsecured notes are attractive for anyone seeking high-quality exposure far out on the yield curve.

Mead Johnson Nutrition MJN A2
Business Risk Cash-Flow Cushion Solvency Score Distance to Default

Good

Very Good

Background

Mead Johnson Nutrition is one of the dominant competitors in the global pediatric nutrition market, which mainly consists of infant formula and toddler milk. The company enjoys growing exposure in emerging markets, a leading brand in a stable category, and relatively inelastic demand for its products.

MorningstarAdvisor.com 37

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Morningstar Advisor - June/July 2010

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