AMD extends slide after weak results; Intel 3.25s trade actively; Peabody up on earnings

By Rebecca Melvin

New York, Oct. 22 - Advanced Micro Devices Inc.'s 6% convertibles extended their slide in active trade Monday after the Sunnyvale, Calif.-based chipmaker missed estimates last week.

Traders were a little taken aback at the sharpness of the drop from above par.

"The way it's acting, it could go lower," a Connecticut-based trader said of the 6% convertibles, which trade on an outright basis. "But it's difficult to say," he said.

Chip giant Intel Inc. saw its 3.25% convertibles traded actively. That paper appeared little changed to down slightly at almost 121, while shares of the Santa Clara, Calif.-based company settled higher by almost 1%.

The Intel 2.95% convertibles also appeared to be "in a little," a New York-based trader said.

A123 Systems Inc. shares continued to recoup losses Monday, but there was no volume in the convertibles of the bankrupt lithium ion battery maker after the paper surged above pre-bankruptcy levels Friday.

Peabody Energy Corp. jumped along with the underlying shares after the St. Louis-based coal miner unveiled unexpectedly solid third-quarter results and an improved outlook.

The bellwether coal name helped lift Alpha Natural Resources Inc., which saw its 2.375% convertibles better by 0.5 point to a point outright at 91 as the underlying shares of the Abingdon, Va.-based coal miner gained.

James River Coal Co. was also quoted up but wasn't heard in trade, a trader said.

Traders said other than earnings-driven trade, the session was quiet. Tuesday's earnings slate is also full with RadioShack Corp., Symantec Corp., Gilead Sciences Inc. and Amgen Inc. on deck.

"RadioShack has the potential to trade a bunch; Gilead always does, so that's likely; and the Amgens are getting mighty short, so they could trade a bunch regardless," a New York-based trader said.

"If earnings are right on target, then a big vol. event passes with nothing, and they come in a bit. But any miss or beat should spur," the trader said.

Also this week, traders have their eye on the Federal Open Market Committee meeting, which gets underway on Tuesday.

One trader said action may be muted until the meeting is over and economic data is released later this week.

Equities ended flat to higher Monday after trading in the red part of the day. The Nasdaq Stock Market added 11.34 points, or 0.4%, to 3,016.96, the Dow Jones industrial average ended 2.38 points better to 13.345.89, and the S&P 500 stock index was less than a point in the green at 1,433.81, up from 1,433.19.

AMD drops again

AMD's 6% convertibles due 2015 traded down several more points on Monday after a 3- to 6-point slump on Friday.

The decline left the bonds at about 92 at the end of the session.

Shares of the Sunnyvale, Calif.-based chipmaker were down again too at $2.10, which was down 8 cents, or 3.7%.

"I would have thought the short-term bottom would have been 95," a New York-based trader said regarding the bonds' reaction to earnings.

The last market was seen at about 91.5 bid, 92.5 offered, and at the 92.5 level, the implied credit spread widened out to about 900 basis points over Libor, from about 700 bps above Libor, the trader said.

The operational risks of the company are greater than for Intel, which has a three- to four-year technological lead on PC processor technology, and its margins are much higher compared to AMD's margins in the 30s, he said.

AMD reported weak fiscal third-quarter results that missed estimates and said it is cutting about 1,800 jobs, or 15% of its workforce, by the end of the year.

Third-quarter revenue sank 25%, and those weak sales led to an under-utilization of capacity.

The restructuring plan is expected to save $20 million in the fourth quarter and $190 million in 2013.

Peabody gains on earnings

Peabody's 4.75% convertibles due 2066 traded up to 92.375 versus an underlying share price of $29.15, and was seen settling out at about 92, which was up from about 88.75 previously. The 3-point plus outright increase gave rise to bids in other convertible coal names, market sources said.

In addition, the Peabody convertibles improved on a dollar-neutral, or hedged, basis by about a point depending on delta. The deltas vary, but on an average 50% delta, the improvement looked to be about a point, a trader said.

Shares of the St. Louis-based coal producer added $3.06, or 12%, to $28.95.

The coal producer reported sharply lower net income of $42.9 million, or 16 cents a share, compared with $274.1 million, or $1 per share, in the year-earlier period. But excluding one-time items, earnings were 46 cents per share, which outdid the 34-cent-per-share forecast.

Revenue in the third quarter was $2.06 billion compared to $1.98 billion in the year-earlier quarter, reflecting 4% growth year over year, and which was also better than expected.

Higher natural gas prices were behind some of the improvement, as electricity producers returned to coal-fired generation in the face of higher-priced natural gas fuel.

For the third quarter, total sales were 66.6 million tons compared with 62.9 million tons in the year-earlier quarter. The year-over-year increase of 6% in coal sales was primarily driven by higher sales from Australia, and trading and brokerage segments, according to a company release.

During the quarter, U.S. revenue rose by 1.1% year over year mainly due to higher realized prices in both the midwestern and western U.S.

Looking ahead, Peabody raised the lower end of its full-year forecast by 10 million tons to between 240 million and 250 million tons.

The company expects full-year EBITDA to be in the range of $1.75 billion to $1.85 billion, and per-share earnings of $2.10 to $2.30 per share. That's better than the $1.50 to $2.68 per share for the full year estimated by analysts.

As of Sept. 30, Peabody had $0.65 billion in cash and cash equivalents compared with $0.8 billion as of Dec. 31.

As of Sept. 30, the company's long-term debt was $6.24 billion versus $6.56 billion as of Dec. 31.

Peabody's capital expenditure was $308.4 million in third quarter 2012, compared with $246.2 million in the year-earlier quarter.

Peabody has 29 coal operations based in the U.S. and Australia and joint venture interests in a Venezuelan mine.

U.S. coal demand rose sharply in the third quarter given higher natural gas prices and a 22% rise in cooling degree days over the long-term average, which led to an increase in coal's market share of U.S. electricity from the low 30% range during the second quarter to 39% in September, the company said.

Peabody projects U.S. coal demand will decline about 120 million tons in 2012, the vast majority of which has already occurred.

Natural gas prices have nearly doubled from their yearly lows to more than $3.50 per mmBtu, resulting in greater generation from plants using Powder River and Illinois Basin coal. Peabody believes that PRB coal is competitive in most plants at natural gas prices of $2.50 to $2.75 per mmBtu, and Illinois Basin is competitive at $3.25 to $3.50 per mmBtu.

A123 quiet

A123 Systems' 3.75% convertible subordinated notes due 2016 were quiet in the 42 bid, 44 offered range, after jumping as much as 10 points on Friday to 48. But they were seen last on Friday at 42 bid, 44 offered, or 43 bid, 45 offered, market sources said.

A123 shares added 6 cents, or 54% to $0.19 on Monday.

Proceedings in the lithium ion battery maker's bankruptcy case have spurred optimism about the value of the company's assets.

China's Wanxiang Group says it can outdo bidder Johnson Controls Inc.

But there are questions about whether regulators will approve a match up with a Chinese company given intellectual property issues.

Mentioned in this article

Advanced Micro Devices Inc. NYSE: AMD

Alpha Natural Resources Inc. NYSE: ANR

A123 Systems Inc. Nasdaq: AONE

James River Coal Co. Nasdaq: JRCC

Intel Inc. Nasdaq: INTC

Peabody Energy Corp. NYSE: BTU

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