Jefferies recoups, moves higher with positive earnings; Navistar looks better on earnings

By Rebecca Melvin

New York, Dec. 20 - Jefferies Group Inc.'s convertibles recouped Monday's losses and then some on Tuesday after the New York-based mid-sized investment bank reported earnings that were better than expected although revenue was lower.

The Jefferies convertibles were a little more than 82 late in the session, after trading up to 83.5 earlier from 77.875, a pricing source said.

Navistar International Corp.'s convertibles looked to be better on Tuesday as well after the Warrenville, Ill.-based truck maker reported better-than-expected quarterly profit, helped by higher demand for trucks in North America.

Alcoa Inc.'s convertibles were flat to slightly higher, and still well in the money with the underlying shares up despite UBS lowering its price target for the Pittsburgh-based aluminum producer.

UBS said it was lowering its estimates to reflect lower realized pricing, foreign exchange and the macro outlook, including soft demand in Europe as debt woes continue to plague that continent.

Overall, the convertible bond market was described as quiet with much of the day's activity falling into the category of window dressing as the countdown to the end of the year continues.

"It was pretty quiet. Trace volume was $406 million on the bond side. The investment-grade names were trading; but the general tone was quiet," a New York-based sellsider said.

Equities reversed Monday's losses and ended with strong gains, with the Nasdaq Stock Market closing with a 3.2% gain. The Dow Jones industrial average and the S&P 500 stock index also gained nearly 3% each.

Lower bond yields in Spain and a surprisingly strong report on the U.S. housing market helped lift U.S. shares.

The Commerce Department reported November housing starts at 685,000, up 9.3% from the revised October estimate of 627,000 and better than the 630,000 that Wall Street was expecting.

Building permit numbers for November also came in better than expected, rising 5.7% to 681,000 from the revised October estimate of 644,000, and better than the 635,000 that were expected.

Trading volumes were on the light side in equities as well. In convertibles, in addition to Jefferies, which was the single highest volume name in trade, high-volume names included Ingersoll-Rand plc, Xilinx Inc. and Alcatel Lucent SA as well as recent regulars Amgen Inc., Gilead Sciences Inc. and Transocean Ltd., according to Trace data.

Jefferies regains

Jefferies' 3.875% convertibles due 2029 traded last at a little over 82 after moving up to 83.5 from about 77.875 on Monday. Monday's level was lower by 2 points.

Jefferies shares surged $2.70, or 23%, to $14.50 after dropping 4% on Monday.

"There was $35 million of Jefferies bonds that traded. That's huge," a New York-based trader said.

"It was much better, but people overdid it," the trader said.

Jefferies battled negative investor sentiment in November after MF Global Holdings Inc. succumbed to pressures related to exposure to European sovereign debt. Jefferies was also exposed to European sovereign debt but was proactive in reducing exposure and keeping lines of information to investors open.

Jefferies' net income included a $12 million after-tax gain on debt extinguishment linked to trading in the firm's own bonds and $2 million in expenses related to the company's acquisition of Prudential Bache. Excluding those items, net income was $39 million.

Revenue, including the one-time gains, fell 19% from the year-earlier period to $554 million. Revenue from sales and trading fell 25% to $286.1 million, and investment-banking revenue dropped 10% to $261.3 million.

Revenue from fixed-income rose from the third quarter. The prior period included September, when fixed income trading fell 38% from $227.9 million in the same period last year. Revenue from trading equities fell to $124.3 million from $155.1 million a year earlier.

Navistar looks improved

Navistar's 3% convertibles due 2014 traded at 110.62 versus an underlying share price of $39.83.

Navistar shares settled up 2.37, or 6.5%, at $38.91.

The name wasn't extremely active with only a few million dollars of bonds changing hands during the session, according to Trace data.

"I think that that's better, but it seems awfully high," a trader said about the bond's pricing.

The convertibles had cheapened after billionaire investor Carl Icahn disclosed in October that he had bought a nearly 10% stake in the company. More recently, the paper's valuation had improved, the trader said.

The commercial and military vehicle producer reported fourth-quarter net income that jumped to $255 million, or $3.48 per share, from $44 million, or 61 cents a share, a year earlier. Excluding special items, the company earned $3.37 per share.

Sales rose 28% to $4.32 billion. Analysts had expected earnings of $3.08 a share on revenue of $4.44 billion.

When Icahn purchased his stake in October, he said he believed the shares were undervalued. At that point, the Navistar 3% convertibles due 2014 were trading around 108 versus an underlying share price of $39.40.

More recently, Jeffrey Altman of Owl Creek Asset Management reported an 8.5% stake in the company and disclosed that he is opposed to Icahn's desire to see Navistar merge with Oshkosh Corp.

Mentioned in this article:

Alcatel-Lucent SA NYSE: ALU

Alcoa Inc. NYSE: AA

Amgen Inc. Nasdaq: AMGN

Jefferies Group Inc. NYSE: JEF

Gilead Sciences Inc. Nasdaq: GILD

Ingersoll-Rand plc NYSE: IR

Navistar International Corp. NYSE: NAV

Transocean Ltd. NYSE: RIG

Xilinx Inc. Nasdaq: XLNX

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