Coinstar jumps after earnings, Verizon deal; Dendreon edges slightly higher after pop

By Rebecca Melvin

New York, Feb. 7 - Coinstar Inc.'s convertibles jumped along with the underlying shares after the Bellevue, Wash.-based operator of coin-counting machines and video rental kiosks reported much better-than-expected fourth-quarter earnings. The company also announced a couple of deals, including a joint venture with Verizon Communications Inc. that will involve streaming video on the web.

Dendreon Corp.'s convertibles edged slightly higher after a pop on Monday sparked by a critical review by regulators of rival Amgen's prostate cancer drug.

Dendreon's value is tied to sales figures of its single product, a prostate cancer drug called Provenge.

DryShips Inc.'s convertibles remained active, with the convertibles following the shares up and trading at 80 on Tuesday, but then backing off to 78 bid, 79 offered versus an underlying share price of $2.72, a New York-based trader said.

Human Genome Sciences Inc. looked to have slipped a lit along with its underlying shares, but trading in that name was not active.

Traders, expressing some frustration, said that Tuesday remained quiet like Monday with pressure felt on specific names related to weakness in the underlying shares, for the most part.

The improvement in valuations from January has slowed down with February so far. And while there are still pockets where there is value, it's not where it was a month or two ago, a New York-based analyst said.

Valuations are stretched in some areas and fine in others, a New York-based trader said.

Coinstar jumps after earnings

Coinstar's 4% convertibles due 2014 traded at 157 during the session and were last at 152.88, which was up 13 points on the day outright, according to Trace data.

Shares of the company jumped $6.97, or 14%, to $57.53 on Tuesday.

"Coinstar was better with the stock better," a New York-based trader said.

On an outright basis, it certainly was, but on a hedged basis it was difficult to tell.

"A second trader said, "It was all over the place. There was no way to tell with the deltas different and big price swings."

The company announced stellar earnings after the market close on Monday after earlier announcing a joint venture with Verizon, under which a video services company will be formed, planned to launch in the second half of the year and set to take aim at competing with video rental giant Netflix Inc.

The venture, which will be 65% owned by Verizon and 35% owned by Coinstar, will combine the Redbox DVD rental kiosk business of Coinstar with an internet video offering from Verizon, including mobile offerings.

Coinstar's Redbox will make an initial capital contribution of $14 million.

Later on Monday, Coinstar's Redbox unit announced that it is buying rival NRC Corp.'s machines and video inventory for up to $100 million, and the company posted strong earnings that were helped by a lift in better credit-card rates.

A strong movie slate also helped it post fourth-quarter revenue of $520.5 million, which was up 33% and higher than the $498 million that analysts had expected.

The company earned $31.5 million, or $1.00 a share, in the fourth quarter, up from $11.7 million, or 35 cents a share in the year-earlier quarter.

Analysts had expected earnings of 65 cents per share.

For the current quarter, Coinstar expects to earn 76 cents a share to 91 cents per share on sales of $530 million to $555 million. Analysts were forecasting first-quarter earnings per share of 86 cents, up 87% from a year ago, on sales of $515 million, up 21%.

Dendreon edges up further

Dendreon's 2.875% convertibles due 2016 were marked at the end of the session at 86.75 bid, 87.25 offered versus an underlying share price of $16.53, according to a New York-based analyst.

That was 4 points better than on Friday and slightly higher than on Monday.

Dendreon shares snapped back on Tuesday, settling lower by 57 cents, or 3.5%, to $15.96 after jumping 17% on Monday.

The Dendreon convertibles are "significantly busted," given that the price for the shares at which the bonds can be initially converted is $51.00.

The paper has about a 7% yield currently and trades on a 24% to 25% delta.

Pushing up the shares and convertibles on Monday were documents posted online, in which the Food and Drug Administration questioned the efficacy of Amgen's Xgeva drug for treating prostate cancer that is at high risk of spreading to the bones, as per Amgen's approval request.

The FDA noted that the Amgen drug did not extend life and carried serious side effects. Although it did slow the spread of cancer to bones by about four months, Xgeva is already approved for preventing fracture in cancerous bones.

On Wednesday, the FDA will ask a panel of outside experts whether the benefits of Amgen's Xgeva outweigh its risks.

The main driver of Dendreon's value is tied to its drug sales every quarter, a New York-based analyst said about the shares and convertibles.

Provenge is Dendreon's only approved product and since April 2010, when the drug was approved, sales have been disappointing, due in part to the drug's high price tag and concerns that it doesn't extend patients' lives by a great deal.

DryShips remains a focus

DryShips' 5% convertibles due 2014 were quoted at 78 bid, 79 offered versus an underlying share price of $2.72 in afternoon trading, which wasn't changed significantly from Monday.

Earlier, DryShips traded at 80 bid, 80.25 offered outright when the stock was higher at midday.

"That was higher than a dollar nuke would have gone, since I think they move on about a 30 [% delta]," a trader said. "So whether they trade over 80 tomorrow or with a 78 to 79 handle is anyone's guess."

The common stock and convertibles of the Athens-based shipping and oil services company shot up on Friday and Monday. And call option volume was somewhat elevated.

"The news flow, buzz and stock action have mostly been centered on Ocean Rig UDW, which accounts for all of DryShips market cap and then some," the trader said.

Mentioned in this article:

Coinstar Inc. Nasdaq: CSTR

Dendreon Corp. Nasdaq: DNDN

DryShips Inc. Nasdaq: DRYS

Human Genome Sciences Inc. Nasdaq: HGSI

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