FTI Consulting richens despite revised outlook; Affymetrix steady; EMC gains after upgrade

By Rebecca Melvin

New York, July 7 - The convertible bond market picked up some steam on Wednesday compared to a slow Tuesday. And a couple of second-quarter outlook revisions to the downside sent the shares of those convert names plummeting even as the convertibles performed well.

The convertibles of FTI Consulting Inc., viewed as an equity alternative, and the company itself being a solid credit, held in or even richened after the adviser to companies lowered its earnings and revenue forecast.

Affymetrix Inc.'s convertibles, which are busted, or not equity sensitive, also held up fine after the biotechnology concern cut its second-quarter revenue guidance and shares sank.

"Affymetrix will hold fine because it is busted and short-dated, with enough cash on hand to make the bonds money-good," a New York-based trader said.

In general, the impact of earnings revisions on the convertibles market needs to be assessed based on the equity sensitivity of the bonds.

"Should the second quarter see a material decline in expectations, which could negatively impact stock prices, then higher-delta names would be disproportionately impacted relative to the lower-delta names," a New York-based sellside analyst said.

Market stalwarts EMC Corp., Amgen Inc. and Medtronic Inc. were also in trade Tuesday. EMC was boosted by its acquisition of Greenplum Inc., a California-based start up provider of data storage technology that enables "big data" clouds and self-service analytics.

Meanwhile, Textron Inc.'s 4.5% convertible notes due 2013 traded at 144 versus a share price of $16.50, a sellsider said.

FTI convertibles outperform shares

FTI Consulting's 3.75% convertibles due 2012 traded at 117.375 bid, 117.875 offered versus a share price of $32.00, which was slightly richer than previous levels, according to a New York-based sellsider.

But gauging pricing was difficult, according to another sellsider, who said the paper hadn't traded in size since mid June.

Nevertheless, FTI's convertibles, considered an equity alternative, "held up pretty well and outperformed the stock," the first sellsider said. "It richened up a little bit."

Given the credit, the equity valuation "shouldn't be enough to move the needle too much," a third sellsider said.

Even though FTI's convertibles "are subordinated to the two straight bond issues that mature after it, there should be sufficient cash/cash flow to take these out when the time comes," the trader said.

The Baltimore-based management-services company revised its second-quarter earnings outlook to 50 cents to 55 cents a share, which was below the average analyst estimate of 74 cents a share.

It also forecast $350 million in revenue for the quarter, which was 3.4% below where analysts surveyed put the quarter's revenue.

FTI shares fell $10.94, or 25%, to $32.33 in heavy volume on Wednesday.

Affymetrix steady, quiet

Affymetrix's 3.5% convertibles due 2038 traded at 93 and also 92 on Wednesday, which was little changed compared to previous levels. Later in the session, the 3.5% convertibles were 90 bid.

One trading source said the paper was not trading actively. "About 400 bonds traded at 92 ahead of the open. There's no activity. It's surprisingly quiet," the sellsider said, quoting the Affymetrix market at 90 bid, 92 offered.

Affymetrix acts like a bond and has little equity sensitivity. However it is worth mentioning that shares of the Santa Clara, Calif.-based company fell $1.51, or 27%, to $4.04 in heavy volume Wednesday.

"With regards to the lower-delta names, you need to determine whether second-quarter earnings results or management forecasts for the third and fourth quarters will impact the credit of the company. If not, then the bonds will hold as their stock may get hit," a sellsider said.

Those bonds have about a 300% premium.

The company, which makes genetic testing technology, expects total revenue for the second quarter to be in the range of $71 million to $72 million compared to previous guidance in the range of $80 million to $82 million.

Delayed and lengthened capital equipment purchase cycles by academic research customers in Europe was cited as a principal factor contributing to the lower-than-expected second-quarter revenue.

Increased sales of DNA products offset by declines in RNA sales that were related to the integration of recent acquisitions and the realignment of sales territories also contributed to lower revenue.

Material deterioration in both the British pound and the euro hurt Affymetrix, the company said.

When the company previously issued guidance, "we anticipated that growth in product sales would offset an expected decline in services revenue as compared to the second quarter of 2009," president and chief executive Kevin M. King said in a release.

"In Europe, we believe our business was impacted by governmental actions taken to address high levels of debt and weakening currencies," King said.

The company has a strong balance sheet and expects to report about $100 million in net cash as of June 30.

But the company will not be providing updated revenue guidance for the rest of the year "due to uncertainty regarding academic research funding and foreign currency fluctuations."

EMC strengthens

EMC's 1.75% convertible notes due 2011 traded at 121.75 versus a share price of $18.30 on Tuesday. The paper was also seen higher at 123 bid, 124 offered.

EMC's 1.75% convertible notes due 2013 traded at 129.5, which was up 4.25 points, according to Trace data.

Both issues were among the top volume names of the day, according to Trace data, a sellsider said.

Shares of the Hopkinton, Mass.-based information technology company jumped 95 cents, or 5.2%, to $19.11 on Wednesday.

EMC, a data storage giant, announced after the market close Tuesday that it will acquire Greenplum in an all-cash transaction that is expected to close in the third quarter, subject to customary closing conditions and regulatory approvals.

Terms of the acquisition were not disclosed. But EMC said it is not expected to have a material impact to EMC's earnings for the full 2010 fiscal year.

Also EMC saw its shares upgraded to "outperform" from "perform" by an Oppenheimer analyst, who raised EMC's share price target to $22.00, citing positive corporate IT trends, and positive trends related to its exposure to the U.S. and Europe.

The analyst expects strong second-quarter results despite a potential macro slowdown, because of rising corporate demand for and spending on data storage systems.

Mentioned in this article:

Affymetrix Inc. Nasdaq: AFFX

Amgen Inc. Nasdaq: AMGN

EMC Corp. NYSE: EMC

FTI Consulting Inc. NYSE: FCN

Medtronic Inc. NYSE: MDT

Textron Inc. NYSE: TXT

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