Bausch and Lomb, Schlumberger get analysts' thumbs up; Halliburton, Medtronic shrug off reports

By Kenneth Lim

Boston, April 24 - The convertible bond market was flattish on Monday amid a weak equity scene, but Bausch and Lomb Inc. got a boost from analysts who saw upside potential on its stock and convertible securities.

In the oil and gas sector, Halliburton Co. was lower on an outright basis in line with the stock despite a raised target price on the equity from a Lehman Brothers analyst. Schlumberger Ltd., which also got a price upgrade from Lehman Brothers, gained modestly in line with the stock.

The market in general had a lackluster session as investors waited for the reporting season to get into full swing, market sources said. A depressed equity market - the Dow Jones Industrial Average slid 0.1% while the Nasdaq composite index declined 0.4% - also affected sentiment.

"It was kinda soft today, stocks seem mostly down," said a sellsider.

Investors shrugged off biotech company Medtronic Inc.'s announcement of increased trial investments, and the company's newest convertibles were stuck below par. The company's 1.5% convertible due 2011 and 1.625% convertible due 2013 were marked at 98.15 versus a stock price of $49.50, while the older 1.25% convertible due 2021 traded at 98.5 at the same stock level.

Medtronic said Monday that it will significantly increase its investment in trials for neurological and urological treatments in the year starting May 1, but investors were unmoved. "It didn't say much," said a sellsider. Minneapolis-based Medtronic, which makes medical devices, saw its stock (NYSE: MDT) close at $49.79, up 27 cents or 0.55%.

Other biotech names seen trading included Genzyme Corp.'s 1.25% convertibles due 2023, which stayed largely unchanged a week after the stock fell on lower-than-expected first-quarter earnings. The convertible traded at 103 versus a stock price of $61.25 on Monday, while Genzyme stock (Nasdaq: GENZ) fell 0.34% of 21 cents to close at $61.05. Genzyme is based in Cambrdige, Mass.

Also, Gilead Sciences Inc.'s new 0.625% convertibles due 2013 slid less than a point outright, in line with the stock, trading at 97.5 versus a stock price of $63. Shares of Foster City, Calif.-based Gilead (Nasdaq: GILD) closed at $63.54, down 1.52% or 98 cents.

In the metal mining sector, Inco Ltd.'s 1% convertible due 2023 was flattish in line with the stock despite the company reporting that it had resumed work at a New Caledonia mine three weeks after violent protests stopped work at the site. The Inco convertible changed hands at 178 versus a stock price of $56. Shares of Toronto, Ontario-based Inco (NYSE: N) declined 0.54% or 30 cents to end at $55.75.

Bausch and Lomb gain on reports

Bausch and Lomb's floating-rate convertible due 2023 was just under a point higher on an outright basis in line with a slight bounce in the stock on Monday after the company's debt and equity securities were seen as investment opportunities by analysts.

The convertible, which has a coupon of 5.311% currently, was marked at 115.75 against a stock price of $46.75 on Monday. Bausch and Lomb stock (NYSE: BOL) closed at $47.48, up 80 cents or 1.71%. Shares of Bausch and Lomb, a maker of eye health products, have lost about a quarter of their value from just over two weeks ago after the company's contact lens solution was suspected of links to a serious fungal eye infection.

In a report on Monday, Lehman Brothers convertible analyst Venu Krishna said the convertible gave "outright investors exposure to a company with a relatively cheap stock and a decent credit profile, an attractive risk/reward profile, high income, and strong downside support."

Meanwhile, "arbitrage investors may take advantage of the high floating-rate coupon, high realized volatility amidst current uncertainty versus the low implied volatility of the security, relatively low theta and a fairly decent gamma profile to trade these bonds on a short to medium term basis."

Convertible holders can write some calls for "an additional kicker" to take advantage of the spike in volatility, while "common holders should actively consider swapping into the convert to get much higher current income, move up the capital structure while retaining upside exposure and limit downside risk should the stock come under further pressure," Krishna wrote.

Also on Monday, Piper Jaffray equity analyst Steven M. Hamill put a $52 price target on Bausch and Lomb's stock and maintained his market perform rating in a research note.

Hamill's price target - which is about 9.5% above the current stock price - reflects the loss of revenue not just from the affected product but also other Bausch and Lomb lines hit by confusion over the extent of the safety concerns and from expected costs incurred in "remediation and advertising efforts."

Bausch and Lomb is based in Rochester, N.Y.

Halliburton slides, Schlumberger gains on reports

Halliburton's 3.125% convertible due 2023 was about 7.5 points lower on an outright basis on Monday as the stock fell in spite of a Lehman Brothers equity research report that raised the target price on the stock.

"The difference in opinion is a difference in how you view demand for [oilfield] services," a buy-side convertible analyst said.

The Halliburton convertible changed hands at 217.5 during the day against an $83.375 stock price. Halliburton stock (NYSE: HAL) fell 3.64% or $3.03 and closed at $80.30.

New York-based Schlumberger, which also had its equity target price raised by Lehman Brothers, fared better, with the convertible up about a point outright as the stock gained modestly. Schlumberger's 1.5% convertible due 2023 was marked at 190.25 bid, 190.75 offered versus the closing stock price of $68.67 on Monday, while its 2.125% convertible also due 2023 was marked at 175.52 bid, 176.02 offered at the same stock level. Schlumberger stock (NYSE: SLB) gained 0.23% or 16 cents.

In two reports Monday, Lehman Brothers raised Halliburton's equity price target to $93 from $89, and Schlumberger's target to $82 from $71.50. The firm kept its overweight rating on both stocks. Lehman Brothers cited Schlumberger's strong market share and market reach and Halliburton's leadership in a recovering industry for its new price targets.

The buy-side convertible analyst said Houston-based Halliburton, which provides oilfield services, is "in the right area in the right business" with demand still high for natural gas. But "there is concern about natural gas prices going down, and Halliburton is more leveraged in North America than companies like Schlumberger."

But there have been recent suggestions that natural gas prices may be going down, which would eventually affect demand for oilfield services. The jury is still out on the Street over whether there is a real cause for concern, the analyst said.

Schlumberger's international reach also makes it less exposed to natural gas prices than Halliburton, the buysider said.

"I think, very long term, this sector should perform well," the buysider said. "Anybody who's exposed to more North American drilling will be a bit more volatile, because North American drillers are smaller...are much more responsive to natural gas prices, so a company like Halliburton will probably be more volatile than Schlumberger."

But the buysider said the convertibles for both companies are currently trading at such high levels they are essentially plays on the stock.

"It's really a stock call when it comes down to it," the buysider said. "There's not much downside protection in these converts. A lot of the energy names, it's a common theme."

But the buysider said the convertibles may be a better way to play such energy names.

"For one thing, the converts will offer you higher yield," the analyst said. "If you have an up view on the stock, maybe you can benefit from a higher yield."

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