Convertibles trading volume light amid equity market volatility; Array, Lumentum gain

By Abigail W. Adams

Portland, Me., Feb. 6 – Trading volume in the convertibles market remained light on Tuesday as equity markets experienced a volatile session after steep losses on Monday.

While the market was down, the equity sell-off has not had that dramatic of an impact on the convertibles space, a market source said. “I haven’t seen any real valuation moves one way or the other,” the source said.

The volatility in equity will be a long-term plus for the convertibles space, but traders seem to be waiting to see what the market will do.

While trading activity was again subdued on Tuesday, after a slow day on Monday, some names were on the tape after reporting quarterly earnings.

Lumentum Holdings Inc.’s 0.25% convertible notes due 2024 and Array BioPharma Inc.’s 2.625% convertible notes due 2024 both climbed on an outright basis in scattered trades after releasing second-quarter earnings reports prior to the market open.

Micron Technology Inc.’s equity-sensitive convertible notes made gains on an outright basis as its stock also climbed in high-volume trading after the memory chip maker raised its second-quarter guidance.

Micron’s 3% convertible notes due 2043 saw some trading action on Tuesday and climbed 9 points on an outright basis.

Micron’s 2.375% convertible notes due 2032, 2.125% convertible notes due 2033, 3.125% convertible notes due 2032 and 1.625% convertible notes due 2033 each jumped more than 35 points on Tuesday, according to a market source.

Volatile market

Equity markets saw a volatile day with the Dow Jones industrial average seesawing between positive and negative territory before closing up 567 points. However, trading action continued to be subdued in the convertibles space on Tuesday.

“A lot of people are on the sidelines waiting to see what the market is going to do,” the source said.

In the long-term, the increase in volatility will be a positive for the convertibles market, the source said. Long-only accounts, however, “may be going through some pain, but that’s not much of a surprise.”

The primary market has been quiet after an active two weeks of new deals pricing. No new deals are expected until the equity market regains its footing.

Lumentum’s second quarter

The quarterly earnings reports are rolling in, and for some companies the impact has been positive even as the broader markets struggle.

Lumentum’s 0.25% convertible notes climbed about 7 points on an outright basis, as its underlying equity soared after beating guidance in its second-quarter earnings report.

The convertible notes traded in a range of 107 to 113 before closing the day just north of 112, according to Trace data. Lumentum stock soared during Tuesday’s session, closing the day at $51.65, an increase of 21.24%.

Lumentum’s non-GAAP net income in the second quarter was $107.8 million compared to $27.8 million in the first quarter and $35.9 million in the second quarter of 2017.

Earnings per share was up to $1.67 per diluted share versus 43 cents per diluted share in the first quarter and 57 cents per diluted share in the second quarter of 2017.

The Milpitas, Calif.-based optical components maker attributed its revenue growth to its 3D sensing, ROADM and laser businesses.

Lumentum took a hit in late January over speculation Apple might cut back production of the iPhone X, for which Lumentum is a supplier.

Lumentum announced on Tuesday that it had shipped $200 million worth 3D sensing lasers to a customer, which was identified as Apple, Reuters reported.

Array’s second quarter

Array’s 2.625% convertible notes due 2024 also climbed on an outright basis in scattered trading activity on Tuesday as the Boulder, Colo.-based biotechnology company’s underlying equity soared.

The 2.625% notes traded in a range of 125.519 to 131.233 before ending the day at 130.754, according to Trace data. Array stock closed Tuesday at $16.28, an increase of 15.54%.

Array reported its second-quarter earnings and an update on its clinical trials prior to the market open on Tuesday. While the company reported net losses, the prospects of its clinical trials were positive.

Array saw net losses of $34.1 million in the second quarter, compared to a net loss of $38 million in the first quarter and a net loss of $23.3 million in the second quarter of 2017.

Earnings per share saw a loss of 17 cents in the second quarter, compared to a loss of 22 cents per share in the first quarter and a loss of 14 cents in the second quarter of 2017.

Array’s phase 3 clinical trial for a combination of drug treatments for a form of melanoma continues to produce positive results.

The Food and Drug Administration is set to take action on the applications for the drug treatments in June and has informed Array it does not anticipate any review issues, according to a company news release.

Micron in focus

Micron’s 3% convertible notes were active during Tuesday’s session, climbing 9 points on an outright basis, according to a market source. The 3% notes were trading in a range of 144 to 147, according to Trace data.

A market source pegged the 3% notes at 151 at market close Tuesday, an almost 9-point gain from Monday.

Micron’s 2.375% notes climbed 40 points on an outright basis to 452. Micron’s 1.625% notes and 2.125% notes both climbed about 35 points to 398.

And Micron’s 3.125% notes climbed 38 points to 436, according to the source.

Micron stock closed Tuesday at $43.88, an increase of 11.37%. Micron upgraded its guidance for its second-quarter earnings to $2.70 to $2.75 per diluted share on Monday and was upgraded by analysts at KeyBank and Needham & Co. on Tuesday.

The consensus estimate for earnings per share for the second quarter is $2.53 per diluted share, according to Zacks Investment Research. Micron is expected to release its second-quarter earnings report in March.

Mentioned in this article:

Array BioPharma Inc. Nasdaq: ARRY

Lumentum Holdings Inc. Nasdaq: LITE

Micron Technology Inc. Nasdaq: MU

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