3M heads higher on earnings news, Shaw up slightly in wake of last week's sell-off

By Sara Rosenberg and Ronda Fears

New York, July 21 - 3M Inc.'s convertible saw a fair amount of volume in trading Monday on the spike in its stock after reporting earnings. Meanwhile, Shaw Group Inc.'s convertible ended the day at slightly higher levels, a move that were noted by market professionals because it came after last week's drop.

3M's zero-coupon convertible was quoted around noon up 1.25 points to 86.375 bid, 86.875 offered with the stock at $135.18, according to one dealer. The convertible closed at 86¼ bid, 86¾ offered, up about ¾ of a point, another trader said, with the stock closing at $136.35, up $6.17 or 4.74%.

"It's a fairly high delta name," the dealer said in regards to 3M. "So it [the 3M convert] will move delta-wise with the stock. With the stock up over $5, it looks pretty good."

In addition to posing a 33% gain in second-quarter earnings, 3M boosted its guidance for third quarter and 2003 results.

The company reported net income of $619 million, or $1.56 per share, versus $466 million, or $1.18 per share, in second quarter 2002. Excluding special items, net income rose 14.8%. For third quarter, 3M expects EPS of $1.56 to $1.60 and for the year EPS is projected at $5.75 to $5.90.

The Shaw Group's 0% convertible due May 1, 2021 was up slightly after a big sell-off last week, according to a market professional.

"There was a bad earnings number and conference call but I think people are getting a little bit more comfortable that they'll be able to pay their puts in 10 months. They're putable at 68.36 on May 1, 2004. Everyone assumes they're going to be put because the conversion price is 77," the professional explained. "There's still a lot of hair on that story. It's an active name. [Shaw Group's convertible] dropped to 61 on Thursday of last week, fell again on Friday and then picked up a little. Now they're around 621/4, 63," the professional said at around 1.00 p.m. ET.

"They're definitely not back to where they were before the sell-off," the professional added. "On July 14 we had them at 641/2."

The convertible closed at 62¼ bid, 63¼ offered, according to a trader, up about 10 basis points. The stock closed at $8.11, up $0.26 or 3.31%.

On July 11, Shaw announced earnings of $3.1 million or $0.08 per diluted share for the third quarter ended May 31, 2003 after recording an after-tax charge of $8.3 million. Excluding the charge, earnings for the period were $11.4 million or $0.30 per diluted share compared to $26.7 million, or $0.61 per diluted share for the three months ended May 31, 2002.

Revenues for the third quarter were $824 million versus $902.6 million in the prior year's third quarter. The decline in revenues was attributed to a downturn in the market for the construction of gas-fired power plants.

The company also revised its earnings and cash flow guidance for the fourth quarter and fiscal year 2004 downwards. Earnings for the fourth quarter are estimated to be $0.23 to $0.25 per share, bringing full year guidance to $0.53 to $0.55 per share. For fiscal 2004, diluted earnings per share are expected to be in the range of $1.15 to $1.25.

Shaw is a Baton Rouge, La. provider of engineering, construction and other services for the power, process, environmental, infrastructure and homeland defense markets.

Overall though, many participants categorized Monday as relatively slow in terms of secondary and primary activity.

"In terms of today, there's no new deals and no news really to move the market," said Jeff Seidel, head of U.S. convertible research at Credit Suisse First Boston.

Lots of convertible paper has been for sale in recent sessions, he said, but trading volume was typically slow for a Monday during the summer. In particular, new deal flow has slowed somewhat in the past couple of weeks.

"The deal flow is going to have to soften up," Seidel said. "It got a little bit ahead of itself."

He expects the primary market will slow down for the remainder of July through August, from the $3 billion-plus weeks seen in May and June, and begin to seasonally pick up in the fall or the latter part of third quarter.

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