Amgen climbs with earnings; Halliburton, Schlumberger slip outright; PMC-Sierra tumbles on loss

By Kenneth Lim

Boston, July 21 - The convertible bond market was busier than expected for a summer Friday, with earnings reports driving activity in a handful of names.

Biotech heavyweight Amgen Inc. gained outright in line with the stock after the company beat estimates for its second quarter and raised its outlook for the year.

In the oil services sector, Halliburton Co. slid with its stock as the company fell just short of Street expectations in its second quarter and said it may no longer pursue an initial public offering for its KBR unit. Schlumberger Ltd.'s convertibles were also lower on Friday as the shares fell in a sector-wide decline, but analysts and traders were more positive about Schlumberger's results.

PMC-Sierra Inc. reported a second-quarter loss, which sent the convertible tumbling with the stock.

Essex Property Trust Inc.'s newly priced 4.875% convertible preferreds did not see any significant action on their debut, with onlookers citing generally limited interest in preferreds issued by real estate investment trusts.

The convertible bond market overall had a relatively active session, with earnings and declines in equity markets driving volume.

"The [equity] market's down again," a sellside convertible bond trader said. "We had a 212-point rally two days ago and it felt like two years ago."

Also trading on Friday, Intel Corp.'s 2.95% convertible due 2035 halted its previous day's slide, trading mostly unchanged as the stock enjoyed a modest gain. The convertible changed hands at 80.5 against a stock price of $17.10, while Intel stock (Nasdaq: INTC) finished at $17.15, up by 0.27% or 5 cents.

Amgen enjoys earnings boost

Amgen's two newest convertibles were better on an outright basis on Friday, in line with gains in the stock after the company surpassed estimates and raised guidance.

The company's 0.125% convertible due 2011 traded at 95 against a stock price of $65, while its 0.375% convertible due 2013 changed hands at 95 versus a $66.50 stock price. Amgen stock (Nasdaq: AMGN) added 3.49% or $2.23 to end at $66.15.

"The stock should have done well today," a sellside convertible analyst said.

Thousand Oaks, Calif.-based Amgen reported late Thursday that it had a second-quarter net profit of $14 million, or a penny per share, after taking a hefty $1.1 billion charge related to its acquisition of Abgenix. Excluding the Abgenix charge, stock option expenses and other items, earnings for the quarter were $1.24 billion, or $1.01 per share, compared to $1.1 billion, or 83 cents per share, in the year-ago period. Analysts had been expecting 94 cents per share.

The biotech company also raised its full-year guidance for adjusted earnings to between $3.75 and $3.85 per share, from the previous forecast of $3.60 to $3.70 per share.

"They had very good earnings," the analyst said, noting that all of Amegn's key drugs were reporting sales growth.

With a premium hovering around just 15%, Amgen's convertibles track the stock pretty closely, the analyst added.

"It's pretty much moving with the stock," the analyst said.

Oil services slump on earnings

Halliburton and Schlumberger convertibles traded lower on Friday in line with sector-wide stock declines amid slightly disappointing earnings.

Halliburton's 3.125% convertible due 2023 lost about 15 points outright, trading at 165.125 against $30 late Friday. Halliburton stock (NYSE: HAL) closed at $30.04, down by 8.08% or $2.64.

Schlumberger's 2.125% convertible due 2023 fell about two points, and was marked at 164 versus a stock price of $63.15. Its 1.5% convertible due 2023 actually gained about a quarter-point in early trading and was marked at 173 versus a stock price of $61.90. Schlumberger stock (NYSE: SLB) closed down 0.34% or 21 cents at $61.45.

Houston-based Halliburton said late Thursday that its second-quarter income rose 32.6% to $509 million, or 48 cents per share, a penny short of Street estimates of 49 cents per share. The company also said it may no longer want to divest its engineering and construction unit KBR through an initial public offering, and is currently seeking a tax-free spin-off instead.

"It's not a credit story," a sellside convertible analyst said. But the convertible, which is far in the money and trading at a very low premium, trades very much like a stock and would have followed the common's dive, the analyst said.

A buyside convertible analyst said Halliburton's slight miss was not a big surprise.

"Most of the missed earnings come from KBR, and KBR was supposed to IPO at some point," a buyside convertible analyst said. "The KBR business is their engineering business, and that business in Iraq is kind of lumpy by its nature, so once in a while you may get issues like that."

The buysider said Schlumberger's results seemed better.

New York-based Schlumberger said Friday that its quarterly profit jumped 78% to $857 million, or 69 cents per share. Earnings per share excluding charges were 73 cents per share, beating analysts' estimates around 63 cents per share.

"I like the strategy of going to international markets," the buysider said. "And they don't face a whole lot of local competition."

But a sellside convertible bond trader said there may be some risk with the Schlumberger 1.5% paper, which does not have dividend protection.

"When the stock doesn't go up as much as it should, the company can either buy back shares or pay a dividend, so I would be worried about companies with underperforming stocks and a lot of cash," the trader said.

PMC-Sierra crashes on loss

PMC-Sierra's 2.25% convertible due 2025 fell about 13 points outright on Friday, falling below par as the stock lost more than a quarter of its value on the company's second-quarter loss and disappointing guidance.

The convertible traded at around 93 against a stock price of $5.15. PMC-Sierra stock (Nasdaq: PMCS) dived 26.36% or $1.84 and closed at $5.14.

Santa Clara, Calif.-based PMC-Sierra said late Thursday that it lost $31.3 million, or 15 cents per share, in the second quarter, compared to a $529,000 profit, or close to zero cents per share, in the year-ago period. For the third quarter, the telecommunications semiconductor maker expects revenue of $122 million to $124 million, below the previous Street estimate of about $128 million. Part of the disappointment stemmed from the company's recent acquisition, Passave, which did not perform as well as analysts were expecting.

"Basically the company made an acquisition that's not panning out for them," a buysider convertible bond analyst said. "They have to spend a lot of money on R&D, so when they miss revenue that becomes an issue. That's why it's such a big drop when they report this. It's an event risk, I guess."

Essex sees quiet start

Essex Property's newly priced 4.875% convertible preferreds were quiet on their first secondary market outing on Friday as observers reported limited interest in the deal.

The $130 million overnight deal priced at the cheap end of talk early Friday, with an initial conversion premium of 18%. The 5.2 million preferreds were offered at par of $25. Price talk was for a dividend between 4.375% and 4.875% and an initial conversion premium between 18% and 22%.

Essex common stock (NYSE: ESS) closed at $115.78 on Thursday.

There is a greenshoe option for a further 780,000 preferred shares worth $19.5 million.

Banc of America Securities was the bookrunner of the registered deal.

Essex, a Palo Alto, Calif.-based real estate investment trust, has a portfolio of residential properties on the West Coast. It will use the proceeds of the deal to pay down its outstanding debt that currently bears a blended interest rate of 5.76%, to fund its development pipeline and for general purposes.

"REITs aren't usually very interesting, and we don't really look at preferreds," a buysider said.

A sellsider said investors who got the preferreds are probably holding them.

"It's the second deal in a row like that," the sellsider said, referring to New River Pharmaceutical Inc.'s 3.5% convertible due 2013, which priced late Wednesday. The New River deal was mostly seen to be interesting only to outright investors because of a lack of stock that could be borrowed for hedge positions.

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