Morgan Stanley Comments On Limited Brands After Debt Offering, Share Repurchase

Citi is comfortable with management of Limited Brands LTD decision to add $1 billion debt to the B/S to repurchase stock, particularly as net debt/EBITDAR is below LTD's 5-year average of 3.1x and below retail peers at 2.8-3x. LTD has returned nearly $10 billion to shareholders since 2000, with 10-year average annual total return of 9% vs. the S&P 500 at 1%. Morgan Stanley thinks the stock can climb higher in ~2 years with confidence in a 16% operating margin and $3.05-3.25 earnings power. LTD announced an offering of $1 billion senior notes due 2021 at 6.625%. In connection, the board authorized a new $500mm share repurchase program. Morgan Stanley expects LTD to use $500mm+ of the proceeds to buyback stock early in 2011. Management expects the debt issuance to be accretive to EPS. Morgan Stanley was already at the high end of 2011 guidance ($2.15-$2.35), so its $2.33 estimate remains unchanged. Morgan Stanley expects LTD to generate about $700mm in free cash flow this year and believes this rate is sustainable for at least the next 3-4 years. Morgan Stanley has an Overweight rating on LTD LTD closed Tuesday at $31.20