Best Buy drops as sales stall; broader market rises with stocks

By Peter Heap

New York, Aug. 8 - Like a home-improvement project gone wrong, Best Buy Co., Inc. left a big ugly hole in an otherwise attractive market Thursday.

A third consecutive day of positive performance in stocks lifted convertibles again but there was also significant selling in retailers as poor news from Best Buy Co., Inc. in particular prompted doubts about how long consumers will continue to spend.

Meanwhile, there was no news on an anticipated units offering by Orbital Sciences, the lone piece of primary action at present.

After the recent weeks of gloom, sentiment was lifted by another big rise in stock prices, with the Dow Jones Industrial Average putting on an additional 255.87 to 8712.02 - a jump that followed upward moves of 182.10 and 230.40 in the two preceding sessions.

Convertibles benefited too. Pretty much everything in the market was higher, one market source noted.

But the three plus days have not left everyone persuaded the bear market is taking more than a short hibernation.

"Maybe there's some people started to think possibly the worst is over; I don't know," commented Stu Novick, convertibles analyst at Salomon Smith Barney.

"There's nothing on the news front to make me think the worst is over."

Asked whether people have cash on the sidelines ready to put to work, Novick said: I know a lot of people have been selling over the past few months but people who have been selling very recently probably don't feel like they have got a lot of dry powder."

A major contributor to the gain in stocks was a sharp rise in financial names, reassured by news of a $30 billion International Monetary Fund loan to ease Brazil's troubles.

But convertibles benefited little even as the underlying stocks rose.

Merrill Lynch's 0% issue due 2031 ended the day at 50 7/8, down marginally from its 51 close on Wednesday, while the Merrill floater due 2032 rose by a small amount to 93.7, up from 93.5. Meanwhile the brokerage's stock firmed $2.26 to end at $35.10.

The Jardine Mattheson 4.75% due 2007 exchangeable for JPMorgan was weaker to close at 96, down from 97 the day before.

For convertibles, the big trouble spot was Best Buy.

Before the market open, the company announced it was lowering its fiscal second quarter earnings outlook to 17 to 21 cents per diluted share from previous guidance of 30 to 32 cents per share. It also said it expected same-store sales to be modestly positive against its earlier expectation of a 4% to 5% gain.

Best Buy attributed the revision to declining consumer confidence which had resulted in flat sales for the past four weeks.

The company's 0.68% convertible due 2021 closed at 63, down three points on the session, as the stock plunged $11.37 to $19.43.

Best Buy's troubles hurt others. Lowe's Cos. Inc. saw its 0% convertible due 2021 drop to 71.2 from 72 and its 0.86% due 2021 drop to 90.4 from 90.8 while its stock slipped $1.26 to $35.22.

Salomon's Novick suggested retailers could now be beginning to suffer from the slide in stocks.

"You have to think to some degree consumer sales are being propped up, particularly on the durable goods and on the housing side because people are emptying their equity portfolios," he said.

But now people may be putting off major purchases and home improvement projects, with consumer sentiment showing signs of turning down and people who haven't cashed already out their stocks unlikely to want to spend large sums - even if they still have the money to do so.

Novick also said he is cautioning investors on The Shaw Group Inc. after the company reported a second project in a week had run into trouble.

In the most recent case, Shaw said Mirant Corp.'s Mint Farm Generation LLC suspended construction on a 34% complete project in Longview, Wash.

The projected represented $93.1 million of Shaw's backlog as of July 31. Although there will be no impact on fourth quarter earnings, Shaw said it is lowering its fiscal 2003 guidance to $2.72 to $3.00 per share from $2.90 to $3.18.

On Monday Shaw said NRG Energy, Inc. would not make the next scheduled payment on its LSP-Pike Energy LLC project due to its liquidity problems.

The company agreed to acquire the project from NRG for $43 million and forgiveness of all amounts currently owed. Shaw will either complete or sell the plant.

While the transaction with NRG is good for Shaw on paper, Novick said, he is also concerned about the precedent and what it might indicate about the rest of Shaw's backlog. Of particular concern is that the projects involved previously strong players in the sector and that there is currently little demand for new power plants.

Although Shaw's convertibles now look cheap - at Thursday's close of 48 bid, 49 offer they have a yield to put of 21% - Novick is advising investors to stay away.

"It's harder to be as confident on the backlog," he explained.

At the 48 closing level, Shaw's 0% convertible due 2021 was essentially unchanged while the stock fell $1.58 to $15.40.

Meanwhile, although market sources were anticipating terms on a new deal from Orbital Sciences on Thursday, at the session's end no terms had been heard.

The Dulles, Va.-based space technology firm is bringing $135 million of Rule 144A units comprised of four-year (likely non-callable) senior secured notes and common stock purchase warrants, via Jefferies & Co. It will use the money to redeem $100 million of convertible notes due in October 2002 and to repay a $25 million term loan.

Price talk was heard Thursday according to market sources: a 12% yield, with warrants for 16 million common shares (approximately 36% of the company), and a 10% premium strike price.

Earlier in Thursday's session the company announced in a press release that its Technical Services Division, based in Greenbelt, Md., has been awarded a two-year $22 million cost reimbursable contract from Lockheed Martin Corporation for engineering support services for NASA's upcoming Hubble Space Telescope servicing mission.

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