Ford, Intel weaker as sell-off persists; Medtronic steady to lower after strong earnings

By Rebecca Melvin

New York, May 25 - The convertible bond market continued to see heavy selling early Tuesday as it and other debt markets took their cues from the equity markets, which opened sharply lower amid persistent European sovereign debt and geopolitical concerns.

But as the equity markets rebounded later in the session, convertibles came back somewhat, although still underperformed the broader markets, market players said.

"The reality is that with the stock market coming back, people don't feel as dire," a New York-based sellside analyst said.

Still, technical factors related to hedge funds and their rigid risk guidelines were cited for causing convertibles to underperform the equity markets. And there were also complaints about the herd mentality in convertibles, which keep things "very one-sided," as well as other issues.

Ford Motor Co.'s convertibles were weaker in trade compared to their underlying shares, even though the Dearborn, Mich.-based automaker is eyed as being well positioned in the current macro environment as a consumer products company serving primarily U.S. markets.

Intel Corp. was also weaker, and with broader exposure to Europe and the sovereign debt situation, it is seen as a larger target for sellers as it is less well positioned in the macro environment.

Medtronic Inc. convertibles were off a little but held in better then their underlying shares after the Minneapolis-based medical device maker posted strong quarterly earnings.

"A lot of Medtronic traded," a sellsider said of the convertibles of the investment grade-rated company.

Ford drops more than shares

Ford's newer 4.25% convertibles due 2016 traded at 132 versus a share price of $11.00. That level was down from 133 to 134 and compared to shares that traded lower for much of the session but ended up a penny at $11.02.

On Monday, the new Ford paper traded at 132.125 to 134.365 versus a share price of $11.17.

"The bond is down about 2 points outright on a stock down 15 cents; that's pretty weak," an analyst said.

But with stuff like Ford down 3 points to 4 points on swap at the open, it might have bounced back by the afternoon, but it wasn't apparent yet.

"There is the lag factor in convertibles; that might be a stale price," the analyst said.

In general, Ford isn't expected to underperform the market due to the better position of names of this type in the current macro backdrop.

"Here's the thing you look for [in things to underperform]: Names that have foreign exposure, bank exposure, credit exposure, exposure to the sovereign credit..." the analyst said.

"Those exposed to U.S. employment and U.S. consumer demand are doing pretty well," the analyst said. "If the company generated a lot of revenue from the consumer sector, then you expect it will outperform."

Intel weaker

Intel's 3.25% convertibles due 2039 traded during the session at 115 versus a share price of $20.20. At the close, the paper was seen at 115.80 versus a share price of $20.85.

Shares of the Santa Clara, Calif.-based chip maker traded most of the session below their previous close but ended the session on the upside by 18 cents, or nearly 1%, at $20.85.

Selling of the Intel convertibles was attributed to outright, European funds trying to raise cash.

The Intel paper is widely held by European funds, which are seeking to sell the paper of the company that is seen as having a large amount of revenue tied to European and other foreign markets and sovereign debt.

"With price cuts in Europe and other countries that are looking at every penny in their budgets to save, companies with exposure there are being hit," an analyst said.

Intel hasn't been hit as hard as biotechnology and pharmaceutical names that are subject to budget cutting for the highest-price drugs there, the analyst said.

"They do generate a lot of revenue in Europe, and depreciation of the euro against the dollar isn't good for them," the analyst said of Intel.

The selling by European funds began about a week ago, the analyst said.

There was very heavy selling of names that are widely held by European funds last week, the analyst said, and by this time they would have completed much of that selling.

Medtronic steady to lower

Medtronic's 1.5% convertibles due 2011, or the A paper, were seen at 98.85 versus a share price of $39.95 at the end of the session; while the Medtronic 1.625% convertibles due 2013, or the B paper, were seen at 101.40, which was lower compared to an earlier market at 102.5 bid, 103.75 offered.

Shares of the medical device maker ended down 69 cents, or 1.7%, at $39.95, which was an improvement from session lows that put the stock down 3.7%.

The equity fell despite Medtronic's strong fiscal fourth-quarter and full-year earnings report and decent outlook posted ahead of the market open.

Medtronic revenue rose to $4.2 billion from $3.8 billion a year ago. Analysts expected $4.19 billion in revenue.

But investors may have been disenchanted with the prospect that Medtronic markets aren't seen as growing at the same pace as they had in the past.

Medtronic said its sales of implantable heart devices grew 13% to $881 million, and total cardiac rhythm disease management revenue rose 8% to $1.41 billion. The company said it gained between $60 million and $70 million in defibrillator sales because of the absence of Boston Scientific in the market for a month.

Boston Scientific, a Natick, Mass.-based company, suspended sales of its leading defibrillator lines for a month ended April 15.

Defibrillators are the top-selling franchise for both Medtronic and Boston Scientific.

Medtronic full-year revenue was $15.817 billion, an 8% increase over fiscal year 2009 revenue.

Fourth-quarter net earnings and diluted earnings per share on a non-GAAP basis were $986 million and $0.89 per share, an increase of 8% and 9%, respectively.

Fourth-quarter net earnings and diluted earnings per share reflect a negative impact from U.S. health care reform legislation related to the elimination of a federal tax deduction for government subsidies of retiree prescription drug benefits by $14.8 million, or $0.01 per diluted share, respectively.

As reported, fiscal year 2010 net earnings were $3.099 billion, or $2.79 per diluted share, an increase of 50% and 52%, respectively.

In its release, Medtronic said that for the first time in its 61-year history, the company's revenue exceeded $4 billion in a quarter.

Mentioned in this article:

Ford Motor Co. NYSE: F

Intel Corp. Nasdaq: INTC

Medtronic Inc. NYSE: MDT

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