Convertibles under pressure; EMC recoups; Amylin strengthens; Kinetic Concepts paper in trade

By Rebecca Melvin

New York, Jan. 26 - Convertibles were still under pressure Tuesday, but sellers seemed to be stepping back and volumes were thin, suggesting that lower bids were not getting hit.

General consensus among market participants was that the market wasn't as heavy as it was late last week.

"Thursday and Friday were clearly the weakest. Volumes are picking up a tad, and although weakness is still apparent with the equity markets behaving this way, implied vols should pick up and help us stabilize," a West Coast-based sellside trader said.

"Rumors of redemptions over the last few days, which appeared to have been quelled, may explain both the sell-off and the slight rebound," the sellsider said.

Many don't see redemptions being a big factor this year after the stellar performance of hedge funds in 2009, with the recent bout possibly resulting from redemptions that had been on hold for a while and only now allowed to occur, according to one New York-based sellside trader.

EMC Corp. bounced back some on Tuesday after the data-storage company reported strong fourth-quarter earnings.

Both convertible issues of Amylin Pharmaceuticals Inc. were active, trading in line delta neutral to slightly higher as their underlying shares surged. These moves came amid speculation that approval of a competitor's diabetes drug may bode well for the biotech company's own diabetes drug pending FDA approval.

Several analysts boosted their Amylin share price target, and Citi upgraded Amylin to "buy" from "hold."

Medical technology company Kinetic Concepts Inc. saw its convertibles in trade after posting fourth-quarter earnings that were better than expected.

Gilead Sciences Inc., which saw its convertibles drop recently, was a little better ahead of earnings that were expected after the market close. Trading action in the name was muted, however, according to one sellsider, who said that ahead of earnings news investors now tend to "just watch and look for a big move in the valuation the next day."

Continental Airlines Inc.'s 4.5% convertibles were up a point, trading at 120 versus a share price of $20.00 on Tuesday, compared to 119 versus a share price of $19.65 on Monday.

Fed meeting eyed

Also a factor in Tuesday's session was that investors were waiting and watching the political arena.

"Much of the market, regardless of the asset class, is sitting on their collective hands as they await news from Wednesday's Fed policy announcement and the President's State of the Union address," a New York-based sellside analyst said.

"While the S&P 500 is up 0.4%, the volume is very light. Also, 44% of today's advance is attributed to the technology sector, which is being influenced by the hardware sector led by AAPL," the sellsider said.

Federal Reserve policymakers were expected to give their assessment of the economy in a statement Wednesday following a two-day meeting, and president Barack Obama was set to give his first State of the Union address Wednesday night.

The Federal Reserve is not expected to raise interest rates until summer, according to many pundits; but interest-rate posture may be influenced if other central banks start tightening ahead of schedule.

One New York-based sellside desk analyst characterized the session as "pretty mixed...maybe a little heavy overall."

EMC recoups

EMC's 1.75% A series convertibles due 2011 traded at 119 versus a share price of $17.35 on Tuesday, according to a New York-based sellside desk analyst.

Later, the EMC paper was seen even higher at 119.75, and shares were a little higher, compared to 117.85 versus a share price of $17.00 on Monday.

Shares of the Hopkinton, Mass.-based data-storage company ended up 67 cents, or nearly 4%, at $17.61 on Tuesday.

Early Tuesday, the company reported fourth-quarter results in which revenue was $4.10 billion, up from $4.02 billion in the same period last year and above the company's $4 billion estimate. Analysts surveyed had expected EMC revenue of $4.03 billion.

Excluding items, EMC earned 33 cents a share, up from 32 cents in the prior year's quarter and above the company's outlook of 30 cents a share. Analysts had predicted earnings of 30 cents a share.

EMC chairman and chief executive Joe Tucci said in a news release, "Emerging from the worst global recession in company history, EMC is in the best financial and operational shape ever. We refined our financial model to a new level of efficiency and cost discipline, while continuing to invest in strategic technologies and high-growth markets.

"We rolled out new and more-advanced solutions and services with the best quality in our history and gained market share. With this positive momentum, EMC stands well positioned to continue to gain share in key markets and drive even greater profitability in 2010."

VMware, which is majority-owned by EMC, contributed fourth-quarter revenue of $607 million.

EMC's full-year 2009 consolidated revenue was $14 billion, including revenue from EMC's Information Infrastructure business of $12 billion and VMware revenue of $2 billion.

For its third quarter, EMC beat analysts' estimates, helped by cost-cutting efforts and a more confident internet technology spending environment.

Amylin in line to slightly higher

Amylin's 2.5% convertibles due 2011 traded at 98.5 versus a share price of $19.25 on Tuesday, which compared to 97.5 versus a share price of $16.00 a week ago, one sellsider said.

Amylin's 3% convertibles due 2014 traded at 81.5 bid, 82 offered Tuesday, compared to a week ago when they were 80 bid, 80.5 offered, the sellsider said.

Shares of San Diego-based Amylin rose $1.56, or 9%, to $19.01 in heavy volume.

Given that move in the underlying shares, the convertibles were in line delta neutral to up 0.25 point, a Connecticut-based sellside trader said.

Investors were cheered by news on Monday that the Food and Drug Administration approved Novo Nordisk's once-a-day injectable diabetes treatment, which bodes well for Amylin's twice-daily injectable treatment, Byetta, which belongs to the same class of diabetes drugs.

A Citi analyst upgraded Amylin shares to "buy" from "hold" and boosted the Amylin share price target to $27.00 from $14.00. A Barclays analyst reaffirmed an "overweight" rating on the shares and raised its price target to $24.00 from $22.00. And a Jefferies & Co. analyst reaffirmed a "buy" rating on Amylin, and boosted his price target to $26.00 from $22.00.

Kinetic Concepts in trade

Kinetic Concepts' 3.25% convertibles due 2015 traded at 103 versus a share price of $41.50 on Tuesday.

San Antonio-based Kinetic's shares gained 54 cents, or 1.3%, to $40.73.

The maker of advanced wound-care products reported better-than-expected quarterly earnings of $66.3 million, or 93 cents a share, which was up from $49.4 million, or 70 cents a share, in the year-earlier period. Excluding items, the company said it earned $1.10 a share. Revenue rose 7% to $526.8 million.

For 2010, the company said it expects revenue of $2.05 billion to $2.09 billion and earnings of $4.32 to $4.46 per share, excluding earnings.

Gilead Sciences flat to lower

Gilead's 0.5% series A convertibles due 2011 traded at 121.5 versus a share price of $45.00, according to a New York-based sellside desk analyst. According to Trace data, the Gilead A paper was at 120.725 in early afternoon, which was down almost 2.5 points from Monday.

Gilead's convertibles had dropped lower in recent sessions amid rumors of a large block for sale and had been climbing back up, but they are still below pre-January levels.

Mentioned in this article:

Amylin Pharmaceuticals Inc. Nasdaq: AMLN

Continental Airlines Inc. NYSE: CAL

EMC Corp. NYSE: EMC

Gilead Sciences Inc. Nasdaq: GILD

Kinetic Concepts Inc. NYSE: KCI

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