Medtronic above par after earnings beat; Jefferies sinks; Cephalon rebounds after weakness

By Rebecca Melvin

New York, Nov. 24 - Medtronic Inc. convertibles moved up several points to more than par on Tuesday, giving the bonds some delta and making them interesting to hedge investors, after the medical-device maker reported earnings that beat estimates and raised guidance.

Jefferies Group Inc.'s convertibles moved lower in trade again as their underlying shares continued to drop amid a generally weaker financial sector. Jefferies shares are down about 10% in the last couple of days.

Cephalon Inc. remained active, with its 2.5% convertibles retracing some of Monday's outright loss to trade Tuesday at 102.25 versus a share price of $54.75, from 101.625 late Monday.

The biopharmaceutical company on Tuesday got an upgrade to "buy" from "hold" from Jefferies & Co., which seemed to boost shares a little bit after they fell 9.5% on Monday on news of disappointing drug trial results.

Meanwhile, Tech Data Corp. retraced some its Monday gain. Tech Data's 2.75% convertibles due 2026 traded at 103.75 on Tuesday, compared to Monday's 104.75 versus a share price of $44.10 and 104.544 versus a share price of $43.45.

Tuesday's session overall was described as generally quiet, with the expectation that Wednesday would "screech to a dead stop" by noon ahead of the Thanksgiving holiday.

"There's probably going to be about an hour's worth of work in the morning," one sellsider said of Wednesday's session.

Medtronic moves above par

Medtronic's 1.625% convertibles due 2013 - the longer-dated of a pair of Medtronic bonds - were seen trading up to 102 and in size on Tuesday, which was well above the 99ish level at which they had been trading for a long period of time.

The Medtronic 1.5% convertibles due 2011 - or the shorter option - were also better, up about 0.625 point to 100. But that level would be less impressive to hedge buyers.

"They have a really high bond floor, and hedge guys can put them on with the stock at this overbought level," a New York-based sellside trader said.

Shares of the Minneapolis-based medical device maker jumped $2.68, or 6.7%, to $43.00 by late afternoon Tuesday.

The reason for the stock move up was Medtronic's strong earnings report that beat estimates and that it raised its earnings forecast going forward.

"With the stock up, that kind of changes the tone on these bonds. Now that they are up above par and the bonds have some delta," the sellsider said.

Previously, the very liquid Medtronic bonds appealed more to outright investors, like Transocean Ltd.'s convertibles.

At that point, "they were active for a different reason," the sellsider said. "Boatloads of them traded, but with it below par, there are some accounts that use it as a parking spot. They use it for a little yield. They are outright buyers down there."

Now a different investor is interested for a different reason. "With the stock up here, and the bonds above par, you can set them up on a hedge, particularly the longer one of the two," the sellsider said.

Another sellsider commented that the delta at these levels would only be about 20%.

But a third source said, "I think people thought they had a boring piece of paper that suddenly has some sex appeal."

Medtronic's fiscal second-quarter earnings jumped 59%, and it raised its fiscal 2010 earnings guidance to a range of $3.17 to $3.22 per share from prior guidance of $3.10 to $3.20 per share.

The company also backed its outlook of increasing sales by 5% to 8%, excluding the impact of foreign currency, for the second half of the fiscal year and beyond.

The company posted a profit of $868 million, or 78 cents a share, in the quarter ended Oct. 30, up from $547 million, or 48 cents a share, a year earlier. Excluding one-time items, Medtronic said per-share earnings rose to 77 cents from 67 cents, which beat the average analysts' forecast of 74 cents a share.

Sales rose 7.5% to $3.84 billion, which was better than a $3.75 billion forecast.

Cephalon 2.5% trades at 102.25

Cephalon's 2.5% convertibles due 2014, which were issued in May, traded at 102.25 versus a share price of $54.75, according to a New York-based convertibles desk analyst, which was up compared to 100.5 to 101.625 on Monday, the level to which they dropped after the company said that a late-stage study for its Cinquil drug to treat pediatric inflammation of the esophagus didn't show significant benefits.

Cinquil was developed by privately held Ception Therapeutics Inc. to treat pediatric eosinophilic esophagitis, or EE.

The Cephalon 2.5% paper expanded on Monday compared to its shares, and on Tuesday it looked to hold value as the shares regained 1%.

Jefferies, Tech Data slip

Jefferies' 3.875% convertibles due 2029 traded down to about 94 on Tuesday, with one sellsider reporting an earlier trade at 95.5 versus a share price of $25.00. That marks a downturn from 95.75 versus a share price of $25.25 on Monday and 99 versus a share price of $27.20 on Friday.

The Jefferies paper traded below par on its debut Oct. 22, with trades in the 95 range a week later, during the last week of October.

Tech Data's 2.75% convertibles due 2026 were at 103.75 near the close Tuesday; and shares of the Clearwater, Fla.-based information technology products company settled down 52 cents, or 1.2%, at $43.01.

That compares to Monday's 104.75 versus a share price of $44.10 on a 45% delta and a later trade at 104.544 versus a share price of $43.45 on a 40% delta, which represented better value for the paper.

Mentioned in this article:

Cephalon Inc. Nasdaq: CEPH

Jefferies Group Inc. NYSE: JEF

Medtronic Inc. NYSE: MDT

Tech Data Corp. Nasdaq: TECD

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