Micron unfazed by earnings miss; investors still eye Alcoa flush; Tyson slips with shares

By Rebecca Melvin

New York, Oct. 8 - The convertible bond market wasn't rocked Friday by the earnings season's first reports or by the U.S. payrolls data that came in somewhat weaker than expected.

Neither Micron Technology Inc. nor Alcoa Inc. was noticeably affected by their quarterly earnings reports, although shares of both companies were higher, a New York-based sellside analyst said.

However, Tyson Foods Inc. convertibles were lower outright and the Springdale, Ark.-based meat producer's shares fell after a government report that cut the U.S. Midwestern corn crop estimate, which is likely to make it more costly to buy grains for animal feed.

Equinix Inc. remained strong, but the three sister convertible bonds were not as actively traded Friday compared to Wednesday and Thursday.

The Equinix 4.75% convertibles expanded by about 5 points to 7 points in total since late Tuesday when the data center services provider issued a revenue warning, a New York-based sellside analyst said.

Wright Medical Group Inc., an Arlington, Tenn.-based medical device maker, tightened further on a dollar-neutral basis on Friday, after trading earlier in the week.

Overall, however, there was not any singular name or market focus on Friday, the day ahead of a three-day holiday weekend for the bond markets in observance of Columbus Day in the United States, sources said.

"I wasn't really paying attention today. For the past one or two weeks, I have been very busy, but with the long weekend ahead, it was quieter," a New York-based sellside analyst said.

"There weren't any very active or topical names today," he said.

Jobs data pumps stocks

Slightly weaker-than-consensus data on U.S. payrolls on Friday was interpreted by the market as an indicator of almost certain Fed action in the form of quantitative easing in November or December, a sellside analyst said.

"It's taken as a done deal. It's not an issue of when, but how," the sellside analyst said.

The news is relevant for the convertible bond market in that there's downside risk for equity markets if the easing doesn't come, and convertibles are very tied to equity markets.

In addition, quantitative easing has major interest rate implications.

"Definitely equity has a big say on our market, and QE2 has big rate implications," the analyst said.

So far, players that didn't hedge their interest rate exposure have done well.

"It has meant very good performance for them, creating a few percentage points of hedge return year to date," the analyst said, adding that the benefit has come to both outright and hedge players.

"I don't think you'd hedge interest rates at this point, with rates going lower instead of higher, and that's going to benefit a lot of people," the analyst said.

Micron unfazed by miss

Micron's 1.875% convertibles due 2014 traded at 91.375, which was up compared to 90.125 on Thursday.

Shares of the Boise, Idaho-based maker of dynamic random access memory gained 51 cents, or 7%, to $7.62 in heavy volume, a move that outperformed the overall market.

Micron's reported numbers were lower than consensus, but given where the news leading up to the third-quarter earnings period was negative, traders weren't "thinking about consensus."

"Going into the third quarter, there were slow PC shipments, soft back-to-school sales, so people weren't holding the consensus number as a benchmark to value Micron," a New York-based sellside analyst said.

"The number was slightly lower, but it didn't cause any selloff or panic - not like Equinix," the analyst said.

The fiscal fourth-quarter earnings report wasn't seen affecting Micron credit.

The company has about $2 billion of cash on its balance sheet, and in addition it has a contract with Samsung relating to royalty payments that should result in about a $300 million payment.

"That's not a lot of cash given the balance sheet, but it's something," the analyst said.

Micron said its fiscal fourth-quarter net income was 32 cents a share, after a loss of $100 million, or 12 cents a share, a year earlier. Analysts had expected earnings of 38 cents a share.

Company sales for the period ended Sept. 2 doubled to $2.49 billion, compared to analysts' estimates of $2.7 billion.

Alcoa flat after earnings

Alcoa's 5.25% convertibles due 2014 were seen little changed at slightly above double par on Friday.

Shares of the Pittsburgh-based aluminum company settled higher by 69 cents, or 5.7%, to $12.89.

Third-quarter net income fell but beat expectations.

"The interesting part of this is the company's comments in its conference call," a sellside analyst said. "Alcoa is still focused on de-levering and considering its maturities in 2011 and 2012."

While the Alcoa convertibles are due 2014, and not in 2011 or 2012, the company must also have this bond in its cross hairs given that it's deep in the money and its interest rate is pretty high for this environment, the analyst said.

"When it's so focused on de-levering, you would expect it [the convertibles] to be in focus. And it's like equity. Nobody would expect it to fall below par, so why wouldn't the company get rid of it earlier rather than later to save some interest," the analyst said.

Just when the company might "equitize," or "flush," the convertibles is anyone's guess.

"They can send out notice or make a tender offer tomorrow," the analyst said.

Alcoa's third-quarter net income fell to $61 million, or 6 cents a share, compared with $77 million, or 8 cents a share, in the same quarter last year.

The result included a charge of 3 cents per share, while the year-earlier period included a 3-cents-a-share acquisition-related gain. Excluding items, Alcoa's adjusted 9 cents per share earnings beat the consensus forecast of 6 cents a share.

Revenue rose 15% to $5.3 billion, mainly due to higher volumes in the aerospace market and increased market share in construction.

Tyson drops outright

Tyson's 3.25% convertibles due Oct. 15, 2013 traded at 115.25 versus a share price of $15.20 and were seen later at 114.75, with shares lower. That was down 3 or 4 points from a level of 118 previously.

Tyson shares fell $1.26, or 7.7%, to $15.01 in heavy volume on Friday.

The profile for this convertible is for both outright and hedge players.

The latest crop report showed a drop in anticipated corn and soybean supply, which will likely make it more expensive to produce Tyson's chicken, beef and pork products.

The U.S. Department of Agriculture report said that the U.S. Midwestern corn crop will be 3.8% smaller than forecast a month ago due to excessive rains and flooding in June and dry weather in August.

A sellsider said it wasn't obvious how the Tyson convertibles performed on a hedged basis.

Mentioned in this article:

Alcoa Inc. NYSE: AA

Equinix Inc. Nasdaq: EQIX

Micron Technology Inc. NYSE: MU

Tyson Foods Inc. NYSE: TSN

Wright Medical Group Inc. Nasdaq: WMGI

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