Intel climbs on raised estimates; Amgen rallies on upgrade; 2007 could return 11%-11.5%, Lehman says

By Kenneth Lim

Boston, Jan. 4 - Positive analyst reports drove convertible activity on Thursday, as Intel Corp. led the technology sector on an outright rally.

Intel rose, in line with its stock after a broker raised his fourth-quarter earnings estimates for the chip maker.

Meanwhile, Amgen Inc. also got a boost after the company's stock was upgraded by Bear Stearns and highlighted as an attractive name by Wachovia Securities.

The convertible market in general saw scattered activity, with trading spread out but lacking a key theme.

"There was a fair amount of volume, but nothing huge," a buyside convertible bond trader said. "Yesterday with the intraday volatility, guys were getting excited, but I think a lot of people are probably still on vacation. From what I've seen, it seems like some folks out there are still wrapping up their vacation."

Market fully valued: Lehman

In its 2007 outlook report, Lehman Brothers said the convertible market is currently fully valued, although returns are likely to hit 11% to 11.5% on the back of equity gains, the upward re-pricing of longer-dated volatility and relative stability in credit spreads.

"While we expect convertible arbitrage returns in 2007 to be relatively more challenging than in 2006, we expect the strategy to yet again post competitive returns most likely outperforming outright returns," wrote Lehman convertible analysts Venu Krishna, Brendan Lynch and Manoj Shivdasani.

"The equity-sensitive nature of the convert market, our expectations of strong new issuance, an expected pickup in longer-dated volatility, a turn in sentiment towards the strategy, resumption of fund inflows, and lower event risk given stronger protection features should all aid returns."

The analysts recommend overweighting typical profile convertibles, cash-pay bond structures, and intermediate-grade and non-rated securities. Portfolios should overweight the telecom, technology, non-cyclical and energy sectors, and underweight cyclicals, the analysts wrote.

Intel leads tech rally

Intel's 2.95% convertible due 2035 gained a point on Thursday, pulled higher after a Banc of America equity analyst raised his estimates for the company.

The convertible traded at 93 against a stock price of $21.15. Intel stock (Nasdaq: INTC) closed at $21.17, up by 4.03% or 82 cents.

"In general tech was up today," a sellside convertible bond analyst said.

Banc of America equity analyst Sumi Dhanda raised his fourth-quarter earnings estimate for Santa Clara, Calif.-based Intel to 27 cents per share, from 26 cents per share, citing strong sales of notebooks and servers. Dhanda raised his 2007 earnings per share forecast to $1.27, from $1.25, and sees fourth-quarter revenue at $9.6 billion. Intel, a maker of semiconductor chips, had projected revenue of $9.1 billion to $9.7 billion in the quarter.

Dhanda said Intel may have gained market share against rival Advanced Micro Devices, and noted positive sales of Intel's Core 2 Duo mobile processors.

A buyside convertible analyst said the stock gains on Thursday may have been a little overdone.

"A lot of it is just sentiment," the analyst said. "I'm not sure the increase is justified. It's just one analyst and he's not really raising his estimates that much, just a cent. Sales are still expected to fall within the company's own forecasts, so it's not that big of a surprise."

But the analyst thought that Intel was an interesting outright story.

"Their new processors look like they were pretty well received, so there's optimism that they may take back some market share from AMD," the analyst said. "People were concerned last year and the year before because they were really losing market share to AMD, but now perhaps they might be able to reverse that trend."

Amgen gets upgrade boost

Amgen also rallied on Thursday, in line with its stock after a couple of brokers issued positive recommendations.

Amgen's 0.125% convertible due 2011 and 0.375% convertible due 2013 improved two points outright, to change hands at 101 versus a stock price of $70.90. Amgen stock (Nasdaq: AMGN) closed at $71.33, up by 4.28% or $2.93.

"Amgen was pretty much flat," a buyside convertible trader said. "It was more kind of a delta neutral."

Bear Stearns equity analyst Mark Schoenebaum upgraded Amgen stock to outperform from peer perform, saying concerns about new competition for its anemia drugs have already been priced into the stock.

Roche's continuous erythropoiesis receptor activator, or CERA, is expected to be approved in mid-2007, and will compete against Amgen's Epogen and Aranesp anemia drugs. With that competition already included in Amgen's stock price, there is potential for upside surprises, Schoenebaum wrote. A favorable court ruling on a patent infringement suit against Roche or obstacles from the Food and Drug Administration for CERA, for example, could create significant upside for Amgen stock, the analyst wrote.

Meanwhile, Wachovia equity analyst George Farmer also recommended owning Amgen stock. Farmer also cited potential problems for CERA, and noted improvements in Amgen's gross margin and a strong near-term product pipeline.

Amgen is a Thousand Oaks, Calif.-based drug maker.

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