GM, Ford convertibles move up in active trade; AMD, Genzyme, airlines also gain, other sectors quiet

By Rebecca Melvin

Princeton, N.J., July 14 - Parts of the convertibles market were active Thursday as a combination of positive economic data and earnings news lifted big-cap stocks, and oil prices came off. Ford Motor Co.'s convertibles and two of General Motors Corp.'s three convertible bonds jumped following an unexpected upgrade on the equity side for GM.

Earnings news boosted activity in Advanced Micro Devices Inc. and Genzyme Corp., lifting those convertibles. And airline convertible paper also moved higher in thin trade amid another down day for oil prices. Delta Air Lines Inc. also announced plans to hike some fares.

But after the close, convertibles market participants eyed the not-so-hot earnings of Rambus Inc. and news that Brisol-Myers Squibb Co. agreed to sell its consumer health business to Swiss pharmaceutical giant Novartis AG for $660 million.

Activity in the day-old issue from Advanced Medical Optics Inc. remained robust with trades of the 1.375% convertible up more than a point at 104.75. But more deals in the primary market failed to materialize.

Convertible trading got off to a brisk start after the release of economic data before the bell that indicated that inflationary pressure may be contained and the economy is perhaps stronger than some suspected.

The Consumer Price Index, which measures how much consumers pay at the retail level, was unexpectedly flat in June, compared with decline of 0.1% in May, which had been the first outright drop in 10 months.

"The positive spin on CPI data has helped interest rate-sensitive names," a New York-based convertibles desk analyst said.

Upgrade boosts GM, Ford

The $25 convertible bonds of General Motors and Ford's convertible preferreds gained in active trading after Lehman Brothers upgraded the automotive sector and General Motors common stock, and bond investors eyed tighter credit from the No. 1 U.S. carmaker.

Lehman analyst Darren S. Kimball raised the sector's rating to "Neutral" from "Negative," saying that General Motors' sales pace has not slowed materially and industry sales could beat June levels.

In a separate report, the analyst upgraded GM to "Equal Weight" from "Underweight," citing strong liquidity, strong results at GM's financial unit GMAC, and Kirk Kerkorian as a backstop.

Lehman's convertibles analysts followed on with an update of their own. In it they continued to recommend swapping into GM's 6.25% convertible and out of the common stock and a convertible swap out of the 5.25% and into the 6.25s.

The team said that since it originally recommended these swaps on May 9, they have worked better than expected. Both the 6.25% and the 5.25% had "a fairly high upside participation rate as the common was up 18.2% over the period," their note said.

The Lehman research stated that the 6.25% is 4.81% cheap at current levels, and the 6.25 long swap provides a 3:1 risk/reward profile with 90% upside participation and 30% downside participation should the stock move up to $42 or down to $30 over the next year, as per estimates.

The Lehman analysts said that swapping out of the 5.25% bonds into the 6.25% bonds makes sense because it would cut premiums, and thereby extend call protection by more than a year. Also the 6.25s have a current yield that is 22 basis points higher than the 5.25s, or 7.18%.

The GM 6.25% convertible bond gained 0.51, or 2.34%, to 22.28 and the 5.25% bond added 0.34, or 1.8%, to 19.24. But the 4.50% bond was unchanged at 24.40. Shares of GM surged $1.13, or 3.15%, to $37.00.

Ford's 6.5% convertible trust preferreds added 0.44, or 1.1%, to 41.81. The automaker's shares added 20 cents, or 1.87%, to $10.89.

Genzyme beats the Street

Genzyme's convertibles gained after the Cambridge, Mass.-based biotechnology company posted strong earnings that beat expectations and boosted future guidance.

The company announced a 58% jump in net income to $123.6 million, or 46 cents per shares, compared with $78.2 million, or 33 cents, in the year ago period. Revenue rose 22% to $668.

"These results demonstrate the full effect of our diversification efforts and highlight the value created by our investments in manufacturing and in our global commercial infrastructure," Henri A. Termeer, Genzyme's chairman and chief executive, said in the earnings release.

Diversification means that the former one-drug company now has a range of drugs to treat rare and chronic diseases. For example, Fabrazyme, which is for the rare genetic disorder Fabry disease, had sales of $74.4 million for the quarter, 50% higher than the year-ago quarter. And revenue from Synvisc, a treatment to provide lubrication for ailing knee joints, more than doubled to $58.8 million.

Genzyme's original stalwart, Cerezyme, saw sales grow 13% to $236 million. Cerezyme is an enzyme replacement therapy for an often-fatal disorder called Gaucher disease.

Genzyme raised its full-year revenue forecast to a range of $2.6 billion to $2.8 billion, from an earlier estimate of $2.5 billion to $2.7 billion.

It raised net earnings expectations to $1.75 a share to $1.80 a share, up from $1.72 a share to $1.78 a share. Excluding items, Genzyme now expects earnings of $2.20 to $2.25 per share.

Genzyme's 1.25% convertible due 2003 gained about three points to 107.50. Its shares surged $3.97, or 6.46%, to $65.30.

Durect climbs higher

The updraft seemed to help extend the heady climb of Durect Corp., which saw its convertibles jump again.

The Cupertino, California-based drug development company has various product candidates under development in the area of pain and chronic disease and disorders. On Monday, Global Crown Capital initiated coverage on the company at "overweight," based on the fact that the company is developing new and improved products targeting large markets with drug delivery innovations.

Durect's 6.25% convertible due 2008 jumped to 194 bid, 196 offered, according to a West Coast trader, up from a recent level of 173 bid, 175 offered, versus a stock price of $5.30. Durect's share price on Thursday was $5.88, up 11 cents, or 1.9%.

"That issue is probably near double par," a convertibles analyst in Connecticut said. "I'd buy it for 194."

AMD betters expectations

One of Advanced Micro Devices' two convertible issues continued to gain, as it has for about a week after the San Jose, Calif.-based chipmaker reported second-quarter profit fell 65% compared to a year earlier, but beat Wall Street's expectations.

AMD's processor sales grew 38% compared to the same period last year, but the division that makes flash memory for cellular phones and other devices saw revenue slump 31%. AMD plans to spin off the flash memory business in an upcoming public offering.

In trading Thursday, the chipmaker's 4.75% convertible gained nearly a point to 105.375. Its share price climbed 63 cents, or 2.27%, to $19.88.

Airlines enjoy the skies

The convertibles of airlines extended their advance Thursday, albeit in seemingly thin volume, as Delta Air Lines said it would raise its fare caps and crude oil dropped to $57.80 a barrel, a 3.7% decline following a 1% drop on Wednesday.

Southwestern Airlines Inc. also posted better-then-expected earnings.

Two traders that regularly trade airlines convertibles reported no trades Thursday.

Interestingly, one sellside shop that regularly trades airline convertibles showed a nearly five point jump for AMR Corp.

The parent of American Airlines' 4.25% convertible traded at 95.881 bid, 96.381 offered, up from 90 bid, 91 offered on Wednesday.

Delta's convertibles showed a better than four point climb to 38.252 bid, 38.752 offered for its 2.875% convertible due 2024, up from 33.982 bid, 34.482 offered on Wednesday.

Atlanta-based Delta, the nation's third-biggest carrier, raised the cap on its most expensive fares by $100, a move that was quickly matched by several rivals.

Blaming high fuel costs, Delta boosted the cap on one-way walk-up fares to $599, up from $499, for economy class and to $699 for first class. The move comes six months after the company announced a ticket price overhaul designed to draw in more business travelers.

Rambus outlook clouds

The convertible issue of Rambus didn't appear to trade on Thursday ahead of its earnings report, which revealed later that second quarter net income fell 36%, in line with expectations.

The company also said that setting financial targets for the second half was a challenge since the Los Altos, Calif.-based maker of computer memory technology was in the midst of negotiating a number of licenses for its technology.

Rambus said income fell to $5.26 million from $8.32 million. But revenue rose 14% to $40 million.

Rambus' 0% convertible due 2010 was seen at 80.1 bid, 81.5 offered. Its shares closed up 49 cents, of 3.46%, to $14.64. But shares fell 4.9% in after hours trading.

The convertible issue of Bristol Meyers didn't seem to trade either ahead of news that it is selling the over-the-counter unit that makes Excedrin, the Keri line of skin-care products, No-Doz anti-drowsiness tablets, 4-Way nasal decongestant, Comtrex cold and flu products, the painkiller Bufferin and Mineral Ice topical painkiller.

The Bristol Myers 2.91% convertibles due 2023 were seen at 98.66 bid, 99.16 offered, after trading at 98.74 on Wednesday. Its shares slipped 17 cents to close at $25.07. They shed another six cents in after-hours trade.

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