NetApp tumbles on weak earnings, sector woes; Kodak converts underperform; JA Solar hit on loss

By Kenneth Lim

Boston, Aug. 18 - NetApp Inc. fell Thursday on disappointing earnings, as convertibles in general fell with underlying stocks on a dismal day for equities.

Eastman Kodak Co. continued to rise modestly, but the convertibles were underperforming the stock amid speculation of a sale of the company's patents.

JA Solar Holdings Co. Ltd. was marked lower after the company also missed expectations on its quarterly report.

The broader convertible market suffered on Thursday as investors abandoned equities to pick up safer assets following negative reports about the global economy and European banks.

In convertibles, most of the activity focused on investment-grade names as investors shied away from poorer credit-quality paper.

"About half of the volume was in investment grades," one sellside trader said.

Another trader said the spike in volatility made it hard to make a market in lower-grade convertibles.

"That's not really what people want to touch at a time like this," the trader said. "The investment grades are doing a little better, but most of them are still down outright. Tough day."

EMC Corp.'s 1.75% convertible due 2013 was a higher-quality name that drew strong flows. The convertible fell about 8 points outright to trade at 138.5 versus a common stock price of $20.60 apiece. The shares fell 8.53% or $1.92 to close at $20.59 on Thursday.

"EMC was kind of dragged lower by the rest of the tech sector because of a number of disappointing earnings and downgraded forecasts," one sellside convertible analyst said.

"Add to all that a horrible day for stocks. It's caught in the currents."

EMC is a Hopkinton, Mass.-based information technology infrastructure company.

NetApp falls on earnings

NetApp's 1.75% convertible due 2013 fell about 8 points outright on Thursday, but improved by about 3 bps dollar-neutral after the company reported disappointed earnings.

The convertible changed hands at 124 versus a $34.75 stock price.

The common shares of the Sunnyvale, Calif.-based provider of data storage and management services closed at $35.81 on Thursday, down by 14.05% or $5.85 per share.

The company reported first fiscal quarter sales of $1.46 billion, less than the consensus expectation for $1.51 billion. The company also guided for second-quarter revenue of $1.5 billion to $1.6 billion, less than the $1.61 billion forecast from the Street.

"NetApp's interesting because their results weren't as bad as the stock suggests," one trader said.

"They did miss estimates, but I think they were also caught in today's storm."

The convertibles will start to become positive only after the stock appreciates by about 10% if held to maturity, wrote Barclays Capital's convertible research team in a note. The convertibles also underperform the stock if the shares stay flat or decline up to 16% until maturity.

"While in the short term the bonds can be used to express a positive view on the stock, we'd much rather own the equity if our investment horizon is slightly longer dated," wrote analysts Manoj Shivdasani, Venu Krishna and Piyush Anchilya.

Long convertible holders can write calls that expire at the same time of the convertible to try and pick up some premium, while hedged investors can short the stock and buy puts to take advantage of the cheap implied embedded put at current prices.

"We find the trade of long convert, short stock (parity amount) and short puts attractive," the analysts wrote. "At 4x leverage, the return on the trade is 12.3% annualized."

Kodak grinds higher

Kodak's 7% convertible due 2017 traded at 65 against a common stock price of $3.11 on Thursday, up by 5 points outright on the day as speculation continued about the company's efforts to sell its portfolio of patents.

The common stock was up by 13.38%, or $0.36, for a close of $3.05 per share.

Eastman Kodak is a Rochester, N.Y.-based imaging technology company.

The shares have jumped by almost 50% since a report this week that valued the company's patents at $3 billion, significantly more than Eastman Kodak's current $820 million market capitalization. There have also been reports that the company has been marketing its patents.

But the convertibles have not been able to keep up with the common stock.

"The converts have been underperforming the stock because there's no borrow," one trader said.

JA Solar marked lower

JA Solar was marked lower outright on Thursday after the company reported a weak quarter, but actual trading in the convertible was extremely thin.

"Didn't see those over here," one trader said. "Kind of a high-yield name and very small market cap."

The company's 4.5% convertible due 2013 was marked at 83.75 bid, 84.25 offered against a common stock price of $3.80, a quarter-point lower.

Shares of Shanghai, China-based JA Solar, a maker of solar cells, dropped 5.19% or $0.20 on Thursday to go out at $3.65 each.

The company reported a second-quarter loss of 22 cents per share, more than the year-ago loss of 18 cents per share. Investors were hoping for a smaller loss of 19.5 cents per share.

Adding to the market's disappointment, rival solar cell maker LDK Solar Co. Ltd. on Thursday warned that its second-quarter results would fall far short of earlier guidance.

"That's a sector where valuations were overly rich a couple of years back and reality is sinking in now," the trader said.

Mentioned in this article

NetApp Inc. Nasdad: NTAP

Eastman Kodak Co. NYSE: EK

JA Solar Holdings Co. Ltd. Nasdaq: JASO

EMC Corp. NYSE: EMC

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.