Electronics for Imaging falls 9 points, but bonds steady on swap; chips fall; XL up ahead of Frances

By Ronda Fears

Nashville, Sept. 3 - As the chip sector reacted to Intel Corp.'s bleak outlook, several other groups lost ground also as traders said investors were reluctant to hold long positions over the three-day holiday weekend. Hurricane Frances' imminent blast to Florida was another factor in the general market weakness.

"They are running for the doors and can't get out fast enough," one sellside trader said, referring first to convertible traders at the bulge bracket firm and, then, adding that the same comment could apply to players not wanting to be holding long positions over the three-day holiday weekend.

Advanced Micro Devices Inc., Intel's top competitor, was lower Friday along with virtually the entire chip sector. Notable were declines on trading action in Cypress Semiconductor Corp., which issued a warning of its own, and Applied Materials Inc. Traders noted, however, sharp stock drops in Pixelworks Inc. and Fairchild Semiconductor Corp., too.

"When Intel says demand is weak, it is saying the demand cycle for chips has peaked and the need for new equipment is going to slide," said a buyside trader. "That puts pressure on a broader spectrum of the tech sector."

Electronics for Imaging Inc., a print server and computer hardware firm, was another noteworthy loser in the tech field as it warned about results for the remainder of the year. The stock fell more than 20%, and the convertibles lost around 9 points, but traders said the bonds were holding steady on swap.

As Hurricane Frances bears down on Florida before the Labor Day weekend, on the heels of Hurricane Charley - second only to Hurricane Andrew in terms of damage costs - traders said there were, perhaps surprisingly, some insurance issues better bid as investors perceive property insurance rates will be bumped up sharply afterward.

XL Capital Ltd. was finding buyers, with its mandatory moving up by about 0.375 point, along with similar gains in The Hartford Financial Services Group Inc.'s two mandatory issues. There were inquiries about Prudential Financial Inc.'s mandatory, too, but a market source said it had nothing to do with Hurricane Frances.

Ford Motor Co. and General Motors Corp. were both lower, by about a quarter to half-point, still in reaction to production cuts announced by the two big automakers earlier in the week.

Electronics steady on swap

Electronics for Imaging warned of a huge miss in what analysts are expecting for its earnings in the current and following quarters, blaming weak sales in its print controller businesses.

The stock plunged $4.38 on the day, or 21.26%, to $16.22.

Electronics for Imaging's 1.5% convertible due 2023 fell 9 points to 95.125 bid, 95.625 offered. But a sellside trader said the bonds were steady on swap, or if the position were hedged.

"The [Electronics for Imaging] credit is pretty decent despite the fall off" in the stock, said a sellside convertible analyst.

Electronics for Imaging's main products include stand-alone servers that are connected to digital copiers and other peripheral devices and controllers, which are used in digital copiers and desktop color laser printers.

Before the market opened Friday, the company said it expects to post a third-quarter profit of 7 to 9 cents a share, or 12 to 14 cents a share excluding charges and other items, with revenues between $97 million and $100 million. But Wall Street analysts, on average, were estimating earnings at 26 cents a share on revenues of $109.8 million.

For fourth quarter, the Foster City, Calif.-based company said it expects a profit of 8 to 12 cents a share, or 12 cents to 16 cents excluding charges, with revenues between $98 million and $103 million. Analysts, though, were looking for profits of 28 cents on $114.4 million in revenues.

Chips fall in wake of Intel

In sympathy with Intel - the top chipmaker - several semiconductor issues tumbled Friday. Traders said, however, that the bigger factor in many of the declines in semiconductor paper was due to the holiday as lots of hedged players were selling the underlying stocks short as they were fearful to be long over the three-day weekend.

"There just is no demand right now for chips," said a sellside trader. "I think the semiconductor stocks could go a lot lower and that is going to be a drag for the bonds, but we could see more fixed income or crossover high-yield players come back to us. We're already seeing some of that because there is a resurgence in busted converts."

Cypress was an exception, seeing heavy selling in its convertibles as the company posted its own warning. Cypress is forecasting earnings per share of 11 to 15 cents for third quarter and warned that sales are now likely to be 5% to 10% lower than in second quarter. The First Call analysts' consensus for earnings per share was 26 cents with a sequential gain in sales to $271.5 million from $264.3 million.

Culprits were the same for Cypress as with Intel - ongoing softness in customer orders, which has impacted inventory levels and product lead times. Cypress reports fiscal third quarter results Oct. 14.

The Cypress 1.25% convertible due 2008 fell 8 points to 95.375 bid, 96.25 offered while the underlying stock dropped 86 cents, or 8.86% on the day, to $8.85.

Applied Materials Inc.'s synthetics dropped sharply on heavy selling, which one trader attributed to that stock playing catch-up in the sector's decline.

"The [Applied Materials] stock has not fallen as dramatically as its peers, so this is sort of playing catch-up," she said.

The 8% convertible Strides due April 2005 linked to Applied Materials stock, which was issued by Merrill Lynch, dropped a half-point to 21, the trader said, and the 7% convertible Sequins due January 2006 linked to Applied Materials stock, which was issued by Citigroup, fell similarly to 8.

Applied Materials shares lost 63 cents on Friday, or 3.86%, to $15.70.

A buyside convertible trader with a contrarian view on the chip sector said he was a buyer on the weakness. "Semis go into more than computers these days," he said. "The cycle has just slowed. It will continue the uptrend this fall because once the elections are over and the terrorism alert lessens, corporate spending will resume."

Hurricane forces lift insurers

Damages were mounting Friday as Hurricane Frances' strike, just after Hurricane Charley, thrashed Florida homeowners and businesses. But while insurance companies will likely bear the brunt of the costs, traders said the perception that insurance rates in Florida will be raised sharply was causing some buying in insurance paper.

XL Capital's 6.5% mandatory gained 0.375 point to 24.375 bid, 24.5 offered while the stock added 71 cents, or 0.98%, to $73.10 just ahead of Frances bursting into Florida.

Hartford's mandatory convertibles rose similarly, a sellside trader said.

"Insurance rates in Florida are going to go out the roof after this. It's just too much with these two major storms hitting so closely together," the trader said. "The market is reacting accordingly. Almost the entire property and casualty sector was up sharply, as well as the re-insurers like XL."

The trader also cited a Prudential Equity Group report last week that said the U.S. reinsurance industry has entered a period of solid underwriting results.

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