Electronic Arts firm, NetApp in line amid weakness in broader markets; Navistar pulls back

By Rebecca Melvin

New York, Oct. 10 - The convertible bond market Wednesday was sluggish as equities and the broader markets continued a downward move, but the weakness in equities and investment-grade bonds didn't transfer completely into the convertibles space, market players said.

Many names were firm or moving in line on a dollar-neutral, or hedged, basis. Electronic Arts Inc., for example, was steady at above 92 despite a slide in the underlying shares on Wednesday.

NetApp Inc.'s convertibles were lower, but in line, or flat, on a hedged basis, with market players confident that they will remain firm or outperform given a put in the paper upcoming in June 2013.

Navistar International Corp. looked to have pulled back some as shares of the Lisle, Ill.-based truck and engine maker came off in sympathy with a revenue warning from competitor Cummins Inc.

Alcoa Inc.'s convertibles were quiet on the back of the Pittsburgh-based aluminum producer's weaker demand outlook that pulled shares down 4.6%.

One trader observed that he had hoped in-the-money names would get better with the pickup in volatility, but he had seen most things just move down in lock step on a dollar-neutral basis.

Overall, October has gotten off to a weak start, and the upcoming earnings season has become a wild card as it moves into full gear in the next few weeks.

"It's hard to tell; nothing seems to be worth anything," a West Coast-based trader said about what he expects from earnings season.

With the exception of the new WellPoint Inc. deal, there is very little to like, he said. And most players don't like WellPoint because it is 30-year paper, he continued.

Meanwhile, new issuance seems to have tailed off after a healthy spate in September. "There is still a really scarce amount of paper," another West Coast-based trader said.

And for this reason, the trader didn't expect that weak earnings or other shocks would cause market players to "panic" and sell convertibles because of tight supply.

Equities were down for a fourth day, and the Dow Jones industrial average ended the day down 128.56 points, or nearly 1%, at 13,344.97. The S&P 500 stock index and Nasdaq stock market notched lesser losses of 0.6% and 0.4%, respectively.

Many pundits were saying that the market has hit a turning point, and seemed to be rolling over, the trader said. "But I haven't seen a panic, people are starting to trim positions possibly, and take some profits in some winners, but financials have hung in there, and homebuilders were strong today. Everyone is waiting for the real earnings to start."

Electronic Arts firm

Electronic Arts' 0.75% convertible notes due 2016 traded at 92 bid, 92.375 offered, which was little changed on previous levels.

Shares of the Redwood City, Calif.-based videogame publisher ended down 11 cents, or 0.8%, at $12.89 in average volume.

Electronic Arts is not investment grade, but it has plenty of cash, so if investment-grade weakening was beginning to hit the convertibles market, then bids in EA would get hit," a trader said of the fairly liquid Electronic Arts convertible.

The investment-grade straight bond market was weaker overall at midday, with financial names widening between 3 basis point and 10 bps and telecommunication and technology paper widening 3 bps to 5 bps.

NetApp in line

NetApp's 1.75% convertibles due 2013 were seen trading 108.125 bid, 108.375 offered versus an underlying share price of $29.30 late Wednesday, according to a New York-based trader.

That compared to 110 bid, 110.125 offered versus an underlying share price of $30.50 on Tuesday, with the trader employing a 50% delta.

Shares of the Sunnyvale, Calif.-based data storage company were down 90 cents, or 3%, at $29.31, on top of a 1% decline Tuesday.

With the weaker shares, NetApp convertibles were seen as firm on a dollar-neutral basis.

"They weren't weaker at all; they've tracked efficiently on the way down," a New York-based trader said.

A second trader, this one based on the West Coast, said, "They are nuking down, and if they keep doing down, they will open up."

A profit warning from Avnet Inc. was said to be weighing on NetApp shares.

Avnet shares were down close to 5% much of the session after the Phoenix-based electronic storage products company said first-quarter earnings and revenue would be below analysts' consensus estimates.

Avnet cited several factors, including higher sales in Asia where profit margins are low, for the shortfall.

Sales at Avnet's Technology Solutions unit also came in below expectations.

Navistar slips

Navistar's 3% convertibles due 2014 traded down about 0.5 point to 88.875, according to Trace data.

Navistar shares moved lower by 27 cents, or 1.2%, to $21.99 in below-average volume.

A trader though said Navistar's weakness was probably related to weakness in Cummins after it guided lower and said it would be laying off up to 1,500 employees before the end of the year.

Cummins lowered its full-year revenue and earnings before interest and taxes guidance for 2012 and announced actions including cutting its workforce by between 1,000 to 1,500 people to respond to the weakening global economy.

The company lowered full-year revenue for 2012 to about $17 billion from the company's previous guidance of $18 billion, and third-quarter revenue was expected to be about $4.1 billion.

EBIT are now expected to earn about 13.5% for the year, compared to prior guidance of 14.25% to 14.75%, and third-quarter EBIT is expected to be about 12%, based on preliminary results.

"We continued to see weak economic data in a number of regions during the third quarter increasing the level of uncertainty regarding the direction of the global economy. As a result of the heightened uncertainty, end customers are delaying capital expenditures in a number of markets, lowering demand for our products," said Tom Linebarger, Navistar's chairman and chief executive officer.

"We have lowered our full-year revenue forecast for several markets, with the most significant changes in North America heavy duty truck and international power generation markets. Demand in China has weakened in most end markets and we have also lowered our forecast for global mining revenues. EBIT margins will also be below our previous guidance primarily due to the sharp reduction in revenues," Linebarger said in a release.

In relation to layoffs, the company mentioned cost cutting measures, including planned work week reductions and shutdowns at some manufacturing facilities.

Columbus, Ind.-based Cummins is expected to report third-quarter earnings Oct. 30.

Mentioned in this article:

Alcoa Inc. NYSE: AA

Electronic Arts Inc. NYSE: EA

NetApp Inc. Nasdaq: NTAP

Navistar International Corp. NYSE: NAV

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.