Convertibles muted amid earnings reports; Hologic, Merrimack add outright, flat on hedge

By Rebecca Melvin

New York, May 1 - Despite a good number of big stock moves on Thursday - most on earnings-related news - convertibles remained relatively inactive, with limited volume and pricing that trended toward unchanged on a hedged basis, market sources said.

Issuers with outsized stock moves to the upside included Hologic Inc., Merrimack Pharmaceuticals Inc., and Meritor Inc. Issuers with moves to the downside included JDS Uniphase Corp., General Cable Corp. and Hornbeck Offshore Services Inc.

"It was a boring tape," a New York-based trader said of convertibles trading. He surmised that the inactivity was related to limited international participation due to the closure of many overseas markets Thursday for holidays. Higher Treasuries may also have been a factor, he said.

Many European markets excluding the United Kingdom were closed for May Day, and many Asian markets excluding Japan were closed for Golden week.

A second New York-based trader said that there were outright inflows into the market given that it was the first trading day of the month. On an outright basis, the convertible market was "higher across the board," he said.

Among the most actively traded convertibles were Hologic's two bonds, which were higher outright after the Bedford, Mass.-based medical diagnostics company reported fiscal second-quarter earnings that beat estimates and raised full-year guidance. Shares rose 8%.

Merrimack's 4.5% convertibles surged early Thursday to 140 or 141 from around 100, but then eased back to the 125 to 130 range. Shares of the Cambridge, Mass.-based biopharmaceutical company skyrocketed 59% on positive phase 3 study data that showed its MM-398 drug used in combination with two other drugs improved overall survival of patients with metastatic pancreatic cancer. The company also reported earnings.

Stock borrow in Merrimack is difficult, and the bonds weren't seen improving on a hedged basis, a New York-based trader said.

Meanwhile, Meritor's 0.875% convertibles due 2026 were 162.5 versus an underlying share price of $13.50, a trader said. Shares jumped 17.5% after the Troy, Mich.-based truck parts maker reported earnings that beat estimates and raised its full-year guidance.

The Meritor bonds had improved recently after coming in heavily, the trader said. Those bonds have expanded somewhat in recent sessions but were little changed on Thursday, he said.

JDS Uniphase wasn't seen to have traded actively as shares of the Milpitas, Calif.-based network equipment company fell 14% on disappointing earnings. The JDS 0.625% convertibles looked to have changed hands at 98 versus a share price of $10.60, a New York-based trader said.

"It doesn't look like it did anything," the trader said of the JDS bonds' move on a dollar-neutral basis. The bonds had been about 103 Wednesday, according to a market source.

General Cable's convertibles were lower outright but expanded perhaps 0.75 point on a hedged basis after the Highland Heights, Ky.-based diversified industrial company reported earnings that beat estimates but missed revenue guidance and guided below consensus estimates for the current quarter. General Cable shares fell $2.65, or 10%, to $22.97.

Hornbeck Offshore Services' 1.5% convertibles due 2019 were seen changing hands at 110.75, according to Trace data. One trader said the Hornbeck convertibles are expensive, but that they were still attracting buyers.

The Covington, La.-based provider of offshore supply vessels reported a large earnings miss. In addition, average dayrates decreased during the quarter, and there were shipyard delays affecting some of its projected vessel delivery dates.

Elsewhere, HeartWare International Inc. saw its 3.5% convertibles due 2017 trade at 121.5 during the session, and they were last seen at 122 after the Framingham, Mass.-based medical device company reported earnings that sent its common stock up $9.47, or 11%, to $94.43. The HeartWare bonds had been about 115.6 going into Thursday, a market source said.

Hologic adds outright

Hologic's 2% convertibles due 2042 traded at 105.487, according to Trace data. The Hologic 2% convertibles due 2037 added more than 4 points outright to 117. Hologic shares gained $1.67, or 8%, to $22.66 on Thursday.

Hologic reported a net loss, but earnings excluding items were $103.1 million, or 37 cents per share, which was up 10% from the year-earlier period and better than estimates. Revenue grew 2% to $625 million, beating estimates.

In addition, Hologic raised its full-year guidance to earnings of $1.37 per share to $1.40 per share, compared to previous guidance of $1.34 to $1.38 per share, and raised revenue guidance to $2.46 billion to $2.49 billion for the year, up from $2.425 billion to $2.475 billion.

Hologix's strong report was attributed to revenue gains in key product lines such as 3D mammography and Aptima HPV.

Several convertibles traders queried said they don't follow Hologic.

Merrimack little changed

Merrimack's 4.5% convertibles due 2020 traded last at 130 after having surged to 141 from about 100 amid a huge stock spike.

Shares surged 59% to $6.99.

Still that level was not that impressive, a New York-based trader said.

"Our borrow is difficult in the names and trading it doesn't make a lot of sense. Still the bond is about 16 points or 17 points over parity with the stock at $7.00; that's a lot of premium for a name if the borrow is tight," the trader said.

Merrimack said its experimental cancer drug used in combination with two other drugs showed an overall survival of 6.1 months, compared with 4.2 months shown by the other two drugs in patients who were earlier treated with chemotherapy.

The company says it believes its M-398 drug may be effective against other types of cancer. It plans to file for marketing approval later this year.

Mentioned in this article:

General Cable Corp. NYSE: BGC

HeartWare International Inc. Nasdaq: HTWR

Hologic Inc. Nasdaq: HOLX

Hornbeck Offshore Services Inc. NYSE: HOS

JDS Uniphase Corp. Nasdaq: JDSU

Meritor Inc. Nasdaq: MTOR

Merrimack Pharmaceuticals Inc. Nasdaq: MACK

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