Belden Inc. (BDC) is one of the world's largest manufacturers of high-speed electronic cables. The company's offerings include numerous wire and cable products such as multi-conductor, paired, coaxial, flat and optical fiber cables, plus portable cordage, molded cable assemblies, hook-up and lead wire. The company also provides infrastructure products such as racks and enclosures and services for wire management. The company has business units that design, manufacture and market their own products.
Belden can trace its origins back to the early 20th century in Chicago, IL. Since this time, the company has had numerous mergers and acquisitions, including an overseas company. The current form of the company was established in 2004 when Belden merged with Cable Design Technologies Corp. Currently the clientele consists of residential to industrial to governmental entities located thought the world.
At Durig Capital, we have developed a process to review, select, purchase and monitor corporate bonds on an ongoing basis. Enclosed is our review, along with supporting documents, showing why we believe this corporate bond makes sense in clients' portfolios. We reviewed thousands of separate corporate bond listings to find what we believe is currently the best corporate bond for investors. The following includes our selection criteria.
Step 1 - Yield curve at 4-7 years out
Interest rates in the last week have risen off historic lows as seen in the 10-year U.S. Treasury. It is hard to say if the stagnant U.S. economy is picking up steam, remaining steady or dropping. Recent “Black Friday” and “Cyber Monday” numbers suggest that we are picking up steam as consumers spent in record numbers, however housing numbers suggested otherwise. With the mixed news, holding shorter maturities could be wise. Principal reduction is a real risk attributable to inflation and to protect our client in this worst case scenario we would just plan to hold to maturity. At the same time a disinflation period, as some pundits suggest we are entering, could reward investors with real principal appreciation. We continue to recommend shorter maturities which could safeguard against either situation.
Step 2 - The company must be profitable
Revenue for the quarter just ended totaled $411 million, up 15% from the previous year. Net income for the quarter was $0.49 per share giving them a year to date earnings per share of $1.42. During the heart of the financial crisis, Belden earned $0.12 in 2009 and lost $1.11 in 2008. This company has made a remarkable comeback since then.
One of the important factors we like to see in a company is how well they are able to generate cash from their operating activities. Belden has excelled in this area. They have generated over $50 million this year in cash from operations. This number is lower than in years past however one must consider that during the economic downturn, Belden was not reinvesting cash into operations. This year they have increased working capital by about $40 million.
Another component of Belden that is a good safety net for bond holders is that management is confident in its ability to generate cash as is evident with the dividend the company is paying. Without the ability to generate cash, dividends are the first item to be reduced or eliminated due to cash concerns. Belden has been returning about $2.34 million to shareholders every quarter since 2004. If there were any reasons that management thought they could not repay debt, then the dividends would stop being paid.
Step 3 - How about those interest coverage ratios
Through the first three quarters of 2010, Belden has earned $103.49 in earnings before interest, tax and amortization or EBITA. Considering that they currently have $551 million in long term debt outstanding at an average rate of 8.5%, they pay about $12 million per quarter in interest. This means that they, using annual run rates, have about $138 million in EBITA and interest expenses of $48 million. They are almost making enough to pay interest three times over and this is impressive and important.
Step 4 - Debt to cash ratio
Belden currently has $543 million in long term debt and just under $300 million in cash. This is weaker than some companies we review, like the Netflix bonds (NFLX) we reviewed, but our requirements are so high that their cash to debt coverage is better than most. Belden is in the mature growth of the business cycle. They have established products and are working to improve them. Often companies in the mature cycle have less competition and are better established so they can increase debt loads. It is often cheaper, even more so after tax considerations, to finance growth by means of acquisitions and/or increasing working capital to expand/refine production processes. In this stage, they have already proven that they can create cash flow to support the requirements of debt service.
Step 5 - We like companies that have flexible balance sheets
Belden had a balance sheet that can be altered to raise capital if needed. As mentioned above, companies will seek the lower cost financing to meet needs. With $551 million of long term debt and a market cap of $1.6 billion the debt to equity ratio is about 34%. Having the ability to raise cash via debt or equity offering is important because it allows flexibility. An example of this type of restructuring can be found in our DaVita bond (DVA) review.
Step 6 - We like high yields
These bonds currently have a 6.387% yield to worst being called away on 03/15/2015. The corresponding U.S. treasury maturing in 5 years is yielding 1.64%. Although the credit ratings are different, Belden’s yield is 389% higher than the governments for the same time period.
Below are the yields for the different call/maturity dates
|Date||Price||Yield to Maturity|
This is a good 6.387% yield to worst for five years. Even though this issue is lacking the “investment grade” title, a large and growing cash position, the ability to generate cash at a rate three times over interest rate payments, solid and flexible balance sheet and a superb yield to boot, this bond should be considered for fixed income portfolios. These metrics are similar to our previous bond reports such as Frontier Oil (FTO) and Expedia (EXPE).
Yield to Maturity 6.147 %
Yield to Call 6.554%
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Additional information about Belden Inc. can be found at the company's website.
Additional disclosure: Durig Capital is currently recommending Belden bonds to its clients.