Morningstar Advisor - June/July 2010 - 41

and 55% in 2013. This contract profile is one of the strongest in the industry. We expect spreads on Pride’s senior notes to tighten significantly in the coming years as capital spending diminishes and cash flows from the ample backlog are realized. As for the 2019 senior notes, we think that the supply picture for deep-water rigs will have loosened by then, possibly diminishing Pride’s pricing power.

Biogen Idec BIIB AA2
Business Risk Cash-Flow Cushion Solvency Score Distance to Default

Good

Very Good

Very Good

Very Good

about Tysabri’s risks and ongoing capital allocation. The risks surrounding Biogen’s future cash flows are readily apparent, but we suspect that the market is discounting these risks too heavily. If we take Tysabri and the pipeline candidates out of Biogen’s financial prospects, we still think the firm will have plenty of cash at its disposal to meet its obligations to creditors. Also, in the event of a Tysabri recall or legal action, we think management would reconsider its share-repurchase or acquisition strategy. If either happens, most of that future free cash flow may be available to repay debtholders and any other liabilities associated with Tysabri.

Investment Rationale

Becton’s notes trade more in line with stronger A rated securities, but we believe that the firm’s credit position is better than that. The 2013 note looks particularly interesting, offering a much stronger yield than Treasuries with very little risk of default, in our view. Becton has enough cash on hand to meet all of its obligations over the next five years, and it should generate strong cash flow during this period.

Kohl’s KSS A1
Business Risk Cash-Flow Cushion Solvency Score Distance to Default

Background

While growth of Biogen’s two oldest marketed drugs is moderating, Avonex (for multiple sclerosis) and Rituxan (for cancer) continue to dominate their markets. Roughly 50% of Biogen Idec’s pipeline stems from external sources, and several drug candidates have entered pivotal phase III clinical trials.
Credit Rating Rationale

Becton, Dickinson and Co. BDX AA1
Business Risk Cash-Flow Cushion Solvency Score Distance to Default

Good

Fair

Good

Very Good

Background
Very Good Very Good Very Good Very Good

Background

Given Biogen’s current net cash position and the firm’s strong cash-flow prospects, we think the likelihood that debtholders will get repaid in full is high. In our base-case projections, we assume that the firm can generate $7.5 billion of free cash flow in the next five years. These cash flows should be bolstered by the strength of the firm’s two blockbusters, Avonex and Rituxan. But the wild cards for Biogen are MS drug Tysabri and its pipeline candidates. In a scenario that takes Tysabri and Biogen’s pipeline candidates out of future sales, we still have a favorable view of Biogen’s free-cash-flow generation, which we peg at a respectable $5.5 billion over five years.
Investment Rationale

Becton has made a name for itself manufacturing basic surgical instruments such as needles, syringes, and scalpels, among others. The launch of products designed to prevent needlestick injuries is among the firm’s latest achievements; these products now are mandatory in most of the hospitals across the United States.
Credit Rating Rationale

Kohl’s has created a niche by providing a wider selection of brand-name apparel than discounters such as Target TGT and offering more moderate prices and convenient locations than midtier chains such as J.C. Penney JCP.
Credit Rating Rationale

Given the firm’s light leverage, which is currently covered about 2 times by cash and investments, and intriguing cash-flow prospects, we think Biogen’s 2018 issue is trading at a much wider spread than is merited. Debt-market participants appear worried

Becton generates massive cash flows relative to its financial obligations. With a manufacturing capacity expansion coming to an end, we expect that free cash flow will grow by about 25% in fiscal 2010 versus fiscal 2009. Commercial paper borrowings totaling $200 million and $1.7 billion of notes and debentures are very modest relative to Becton’s $18 billion market cap. The firm issued nearly $750 million of new notes during fiscal 2009, with $200 million used to repay a maturing bond and the remainder sitting in cash on the balance sheet. Maturities are well spaced over the next 30 years, with only $200 million of commercial paper and a $201 million note maturing over the next five years.

Kohl’s issuer rating of A1 reflects the company’s strong financial condition, healthy free cash flows, and narrow economic moat. With a debt/capital ratio of 0.21, we consider the company’s capital structure to be conservative. We expect the company to easily cover its contractual obligations over our five-year explicit forecast period. And given the current level of cash and the company’s free-cash-flow generation capabilities, we do not expect that Kohl’s will take on additional debt.
Investment Rationale

Kohl’s trades wider than our credit rating would imply but still tighter than the ratings assigned by the major rating firms. As we emerge from the economic trough and Kohl’s success continues, credit spreads could tighten. K
Haywood Kelly, CFA, is senior vice president of equity and credit research at Morningstar.

MorningstarAdvisor.com 41


http://www.MorningstarAdvisor.com

Morningstar Advisor - June/July 2010

Table of Contents for the Digital Edition of Morningstar Advisor - June/July 2010

Morningstar Advisor - June/July 2010
Contents
New on MorningstarAdvisor.com
Contributors
Letter From the Editor
What Risks to Bonds Are You Most Concerned About?
The Irrational Lizard Brain
Investment Briefs
The Problem With Financial Plans
Preparing for Turbulance
Different Models, Similar Results
The Game Is Up
Some People Are Bullish on Bonds
Bonds We Like
What Does Harry Markowitz Think?
Escape From the Pack
Four Picks for the Present
Rising Rates Could Affect Equities, Too
The Banking Sector Knocks on Wood
Back to Basics
On the Prowl for Smooth Operators
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
New at Morningstar
R-E-S-P-E-C-T
Morningstar Advisor - June/July 2010 - Morningstar Advisor - June/July 2010
Morningstar Advisor - June/July 2010 - Cover2
Morningstar Advisor - June/July 2010 - 1
Morningstar Advisor - June/July 2010 - 2
Morningstar Advisor - June/July 2010 - Contents
Morningstar Advisor - June/July 2010 - 4
Morningstar Advisor - June/July 2010 - 5
Morningstar Advisor - June/July 2010 - New on MorningstarAdvisor.com
Morningstar Advisor - June/July 2010 - 7
Morningstar Advisor - June/July 2010 - Contributors
Morningstar Advisor - June/July 2010 - Letter From the Editor
Morningstar Advisor - June/July 2010 - What Risks to Bonds Are You Most Concerned About?
Morningstar Advisor - June/July 2010 - 11
Morningstar Advisor - June/July 2010 - 12
Morningstar Advisor - June/July 2010 - 13
Morningstar Advisor - June/July 2010 - The Irrational Lizard Brain
Morningstar Advisor - June/July 2010 - 15
Morningstar Advisor - June/July 2010 - Investment Briefs
Morningstar Advisor - June/July 2010 - 17
Morningstar Advisor - June/July 2010 - The Problem With Financial Plans
Morningstar Advisor - June/July 2010 - 19
Morningstar Advisor - June/July 2010 - 20
Morningstar Advisor - June/July 2010 - Preparing for Turbulance
Morningstar Advisor - June/July 2010 - 22
Morningstar Advisor - June/July 2010 - 23
Morningstar Advisor - June/July 2010 - Different Models, Similar Results
Morningstar Advisor - June/July 2010 - 25
Morningstar Advisor - June/July 2010 - 26
Morningstar Advisor - June/July 2010 - 27
Morningstar Advisor - June/July 2010 - 28
Morningstar Advisor - June/July 2010 - 29
Morningstar Advisor - June/July 2010 - The Game Is Up
Morningstar Advisor - June/July 2010 - 31
Morningstar Advisor - June/July 2010 - 32
Morningstar Advisor - June/July 2010 - 32a
Morningstar Advisor - June/July 2010 - 32b
Morningstar Advisor - June/July 2010 - 32c
Morningstar Advisor - June/July 2010 - 32d
Morningstar Advisor - June/July 2010 - 33
Morningstar Advisor - June/July 2010 - Some People Are Bullish on Bonds
Morningstar Advisor - June/July 2010 - 35
Morningstar Advisor - June/July 2010 - 36
Morningstar Advisor - June/July 2010 - Bonds We Like
Morningstar Advisor - June/July 2010 - 38
Morningstar Advisor - June/July 2010 - 39
Morningstar Advisor - June/July 2010 - 40
Morningstar Advisor - June/July 2010 - 41
Morningstar Advisor - June/July 2010 - 42
Morningstar Advisor - June/July 2010 - What Does Harry Markowitz Think?
Morningstar Advisor - June/July 2010 - 44
Morningstar Advisor - June/July 2010 - 45
Morningstar Advisor - June/July 2010 - 46
Morningstar Advisor - June/July 2010 - 47
Morningstar Advisor - June/July 2010 - 48
Morningstar Advisor - June/July 2010 - 49
Morningstar Advisor - June/July 2010 - 50
Morningstar Advisor - June/July 2010 - 51
Morningstar Advisor - June/July 2010 - Escape From the Pack
Morningstar Advisor - June/July 2010 - 53
Morningstar Advisor - June/July 2010 - 54
Morningstar Advisor - June/July 2010 - 55
Morningstar Advisor - June/July 2010 - 56
Morningstar Advisor - June/July 2010 - Four Picks for the Present
Morningstar Advisor - June/July 2010 - 58
Morningstar Advisor - June/July 2010 - 59
Morningstar Advisor - June/July 2010 - Rising Rates Could Affect Equities, Too
Morningstar Advisor - June/July 2010 - 61
Morningstar Advisor - June/July 2010 - 62
Morningstar Advisor - June/July 2010 - The Banking Sector Knocks on Wood
Morningstar Advisor - June/July 2010 - 64
Morningstar Advisor - June/July 2010 - 65
Morningstar Advisor - June/July 2010 - Back to Basics
Morningstar Advisor - June/July 2010 - 67
Morningstar Advisor - June/July 2010 - On the Prowl for Smooth Operators
Morningstar Advisor - June/July 2010 - 69
Morningstar Advisor - June/July 2010 - Mutual Fund Analyst Picks
Morningstar Advisor - June/July 2010 - 71
Morningstar Advisor - June/July 2010 - 72
Morningstar Advisor - June/July 2010 - 73
Morningstar Advisor - June/July 2010 - 50 Most Popular ETFs
Morningstar Advisor - June/July 2010 - 75
Morningstar Advisor - June/July 2010 - Undervalued Stocks With Wide Moats
Morningstar Advisor - June/July 2010 - 77
Morningstar Advisor - June/July 2010 - 78
Morningstar Advisor - June/July 2010 - New at Morningstar
Morningstar Advisor - June/July 2010 - R-E-S-P-E-C-T
Morningstar Advisor - June/July 2010 - Cover3
Morningstar Advisor - June/July 2010 - Cover4
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