D.R. Horton hit by earnings, 'holds in' on hedge; GM flat to lower; Equinix bumps around

By Rebecca Melvin

New York, July 25 - Convertible bonds were mixed on the fortunes of individual companies reporting quarterly earnings, but much of the trading activity anticipated early in the session was prevented by lack of follow through, market players said.

"It felt like it was going to be busy this morning, but then it just died out by noon," a New York-based trader said.

A second New York-based trader concurred, "There's malaise again. It's hard to want to trade anything because the volume is not there."

Earnings reports drove the activity that did occur. D.R. Horton Inc.'s convertibles dropped sharply on an outright basis, but held in on a dollar-neutral, or hedged, basis after the Fort Worth, Texas-based homebuilder missed revenue estimates and reported lower-than-expected orders for its second quarter, adding to concerns that higher mortgage rates are hampering the U.S. housing recovery.

Beazer Homes USA Inc.'s convertible preferreds were down in sympathy with D.R. Horton, a trader said. They traded down a point to 28, he said.

Elsewhere, General Motors Corp.'s mandatories slipped outright, but were unchanged on a dollar-neutral basis, after the Detroit-based automaker reported decent earnings.

Equinix Inc.'s 3% convertibles bumped around but ended higher in active trade after the Redwood City, Calif., data center services provider missed revenue estimates and guided lower on revenue for the third quarter and full year.

DryShips Inc. was seen in trade at 93.25, which was up 1.25 points, according to Trace data. But a Connecticut-based trader said that distressed names overall were "pretty quiet."

"There was some stuff, but mostly just noise," he said, calling the distressed space "a mixed bag."

The primary market was quiet. So far this week only American Realty Capital Properties Inc.'s deal for $300 million of 3% convertibles has priced, leaving some to wonder if the strong pace at which convertibles have been issued so far this year is going to falter.

"I think it's just earnings. Many companies are in quiet periods. It will be interesting to see what happens after earnings season," a New York-based trader said.

The convertible primary market is running at better than double last year's pace, with about $24 billion in new paper issued for the year to date.

D.R. Horton hit outright

D.R. Horton's 2% convertibles due 2014 dropped to 153.4 with the underlying shares at $19.45, compared to 165.5 with the underlying shares at $21.15, a New York-based trader said. They were also seen on the Trace tape at 152.7.

That was down more than 10 points outright, but it was called up 0.125 point on a dollar-neutral basis using a 90% delta.

D.R. Horton shares fell $1.82, or 8.6%, to $19.38.

"They were hit pretty hard. But they were holding in on hedge," the trader said. "It seemed like hedge guys were selling and there was small outright buying on weakness."

D.R. Horton said that rising mortgage rates contributed to increased cancellations and a drop in traffic in June. Rates have climbed in anticipation that the Federal Reserve will scale back its bond purchasing program, which has been propping up demand and holding interest rates down.

Net income for the No. 1 U.S. homebuilder fell 81.5% to $146 million, or 42 cents per share, for the quarter, down from $787.8 million, or $2.22 per share, in the year-earlier period. Earnings were better than expected.

The year-earlier period included a $16.7 million tax benefit.

Revenue rose to $1.64 billion, which was 47% higher than the year-earlier period, but it missed estimates.

Meanwhile, net orders for the quarter totaled 6,822 homes, which was up 12% from the year-earlier quarter but much lower than the most recent quarter. The value of net orders grew 30% to $1.8 billion, which was boosted by increased volume and average sales prices. The cancellation rate stood at 24%, which was lower than the 19% rate of the year-earlier quarter.

GM slips despite earnings

General Motors' 4.75% mandatory convertible preferreds, which mature in December, closed at $50.83, which was down a dime, or 0.2%, according to the New York Stock Exchange.

GM common shares settled lower by 6 cents, or 0.16%, at $37.08.

The mandatories were unchanged on a dollar-neutral basis, a trader said.

"The interesting thing is that GM stock is down on the day and it was up yesterday with Ford and it was up earlier today. The numbers were pretty good," the trader said, regarding GM's results.

GM earned $1.26 billion, or 75 cents per share, for the quarter ended June 30, compared to $1.5 billion, or 90 cents per share, in the year-earlier period.

Excluding one-time items, the company earned 84 cents, which was better than forecasts.

Chief financial officer Dan Ammann said he expects improved performance in the second half on the back of new truck roll outs as well as the 2014 Chevy Corvette sports car, an all-new Cadillac CTS sedan and other new models.

Revenue rose 4% to just over $39 billion, which was better than estimates of $37.7 billion. Ford reported better-than-expected profit on Wednesday, with earnings of $1.23 billion, which was up 18.5% from a year earlier.

Equinix bumps around

Equinix's 3% convertibles due 2014 traded mostly at 168 to 169 on Thursday, which was up from 160 to 161 on Wednesday but down from 177 to 178 on Tuesday.

The Equinix convertibles were also quoted higher on Thursday at 173.5 bid, 175.25 offered when the underlying shares were higher at $190.50, a New York-based trader said.

The trader's firm was quiet in the name prior to the earnings release and had the bonds last indicated at 160 bid, 161 offered versus a share price of $177.00.

Shares bumped up post earnings to $191.49 during Thursday's session but peeled back to close down $7.16, or 3.7%, at $184.47.

"The convertibles were more driven, post earnings," the trader said.

Equinix reported a second-quarter loss due to increased expenses and special charges and missed revenue estimates. It also cut its third-quarter and full-year revenue outlook.

The company lost $28.7 million, or 58 cents per share, for the period ended June 30, including a $93.6 million one-time charge for debt extinguishment tied to the redemption of senior notes. The company reported net income of $36.4 million, or 73 cents per share, in the year-earlier period.

Revenue increased to $525.7 million from $457.2 million but missed estimates. Analysts were expecting earnings of 69 cents per share on revenue of $533.3 million.

Equinix cut its revenue estimate for the third quarter to between $538 million and $542 million. Analysts had forecast $560.6 million. For the full year, the company expects revenue will range between $2.14 billion and $2.15 billion. Analysts forecast $2.2 billion.

Mentioned in this article:

American Realty Capital Properties Inc. Nasdaq: ARCP

Beazer Homes USA Inc. NYSE: BZH

D.R. Horton Inc. NYSE: DHI

DryShips Inc. Nasdaq: DRYS

Equinix Inc. Nasdaq: EQIX

General Motors Co. NYSE: GM

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