Earnings drive trade; Chart Industries jumps outright; Affiliated's 'called' bonds gain

By Rebecca Melvin

New York, July 30 - Quarterly earnings reports drove a good deal of the action in the convertible bond market on Tuesday.

Chart Industries Inc.'s convertibles jumped on an outright basis and expanded on a dollar-neutral, or hedged, basis after the Garfield, Ohio-based engineering-procurement-construction company reported quarterly earnings that were in line or slightly better than expected and reaffirmed forward guidance.

Affiliated Managers Group Inc.'s 3.95% convertibles, which are being called by the company Aug. 15, traded up about 4 points outright and remained at parity after the Prides Crossing, Mass.-based asset-management company handily beat estimates.

United States Steel Corp.'s convertibles were more or less steady after the Pittsburgh-based integrated steelmaker posted a second straight quarterly loss and its fifth loss in seven quarters as low steel prices and union costs put pressure on results.

Away from earnings, SanDisk Corp.'s convertibles saw further selling after Goldman Sachs downgraded shares of the Milpitas, Calif.-based flash memory maker to "neutral" from "buy."

But one buysider said now might be a good time to step into SanDisk if you felt the sell-off was overdone.

Overall the summer slowdown persisted, but earnings were driving volatility in certain names.

Chart expands

Chart Industries' 2% convertibles due 2018 jumped more than 18 points on an outright basis to about 175 with the underlying share s at $113.00 to $114.00.

Chart shares surged on earnings but by the close were off their highs slightly at $112.49, which was up $13.42, or 13.6%.

The convertibles' move represented a dollar-neutral expansion of about 0.5 point to 0.75 point, if the bond was held on a delta of 83% to 86%.

"We heard they were trading on an 86 today," a New York-based trader said of the delta.

The convertible bond "has worked very, very well," an East Coast-based buysider said, adding that "valuation-wise it's a story stock," meaning that investors have to believe that the high-growth portion of the business is going to keep going.

The buysider said orders were good, backlog looks strong and guidance is important.

It's not just a revenue-growth story, but a growth in the future and margin-expansion story.

Chart reported earnings of 77 cents per share for its second quarter. That was a penny higher than the consensus estimate.

Revenue came in at $298.2 million, which was 24% higher than revenue of $239.9 million in the year-earlier quarter and slightly better than the $296.4 million consensus estimate.

Gross margin was 30.1% for the quarter, which was down 80 basis points from the year-earlier quarter.

Looking ahead, Chart expects full-year earnings of $3.17 per share on revenue of $1.22 billion, which was in line with estimates.

AMG higher at parity

Affiliated Managers' 3.95% convertibles due 2038, which have been called, traded Tuesday at 141.3, which was up about 4 points outright but still right around parity, market sources said.

Affiliated shares gained $6.49, or 3.8%, to $179.06.

The shares surged on second-quarter earnings, which more than doubled the year-earlier period and beat estimates.

Net profit rose to $134.2 million, or $1.18 cents per share, from $60.9 million, or 12 cents per share, in the year-earlier period.

Excluding one-time items, the company earned $2.18 per share, which was higher than the $2.10 per share result that analysts' were expecting.

Inflows of new client money rose.

Meanwhile, the bond is "the definition of fair value," a market source said. They were up on earnings, and even though the duration of the option has been shortened dramatically by the company's upcoming redemption, the in-the-money convertible is going to follow the equity.

The company notified holders that the bonds will be redeemed in full on Aug. 15 at par. But the notes may be converted at any time before 5 p.m. ET on Aug. 14 at a conversion rate of 7.9586 shares of common stock per $1,000 principal amount of notes, equivalent to a conversion price of $125.65 per share.

With shares at $179.00, the bonds should be about 41.8 points above par, a market source said.

U.S. Steel flat to lower

U.S. Steel's 4% convertibles of 2014, which are short-dated bonds with a large premium of 80%, traded little changed at about 102.25.

They may move up if the shares rise substantially, but they are not really going to move on the downside, a market source said.

"They didn't move much; they are premium'd out and close to maturity, "the source said.

The more interesting U.S. Steel bond, in the source's opinion, is U.S. Steel's 2.75% convertibles due 2019. That bond moved to about 102.25 from 103 to 104 with the earnings news and the stock's 7% stumble. But the longer-dated bond "is not a bad bond," he said, citing positive yield and longer-term equity participation. "It's a nice, balanced bond."

The only hitch is that one has to be constructive in the steel space. "This has six years of credit risk to the steel industry," the market source said.

U.S. Steel swung to a loss for its second quarter. The loss was smaller than expected, but the Pittsburgh-based integrated steelmaker also gave a cautious forecast for the third quarter.

Management cited an ongoing lockout at its Lake Erie Works in Ontario and slowing in global economic growth during the quarter.

The company lost $78 million, or 54 cents per share, in the second quarter, compared to net income of $101 million, or 62 cents per share, in the year-earlier period.

Revenue dropped 12% to $4.43 billion and fell short of forecasts for revenue of $4.58 billion.

SanDisk stumbles after run

SanDisk's 1.5% convertibles due 2017 traded down to about 126.5, which was down from about 137.5 in mid-July but up from 116.5 at the beginning of January.

Selling on Tuesday was spurred by Goldman Sachs' downgrade of the shares, citing increases in demand and capacity and increasing margin compression going forward.

"People get worried about the memory cycle peaking and rolling over and they trade off," an East Coast-based trader said.

But he said after the profit-taking, now would be a good time to step in.

The bonds "are getting more reasonable as they come back in a bit, and they are expanding a little as they come in," he said.

"It's not a bad bond at all right here, risk-reward wise," he said, citing a 20% premium on a strong BB-rated credit that has four more years of call protection.

"If you wanted to add delta in the tech space, this is a good way to get equity participation, if you think the sell-off was overdone," he said.

Mentioned in this article:

Affiliated Managers Group Inc. NYSE: AMG

Chart Industries Inc. Nasdaq: GTLS

SanDisk Corp. Nasdaq: SNDK

United States Steel Corp. NYSE: X

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