ElkCorp slips; Covanta improves; XM Satellite plunges, Sirius joins; Hornbeck, Trico up; Lamson rises

By Ronda Fears

Memphis, Jan. 19 - Traders said some players in ElkCorp were cashing out Friday, reckoning that the bidding war for the roofing and building supplies company had topped out between private equity firm The Carlyle Group and rival Building Materials Corp. of America.

Higher energy futures Friday and oilfield services giant Schlumberger Ltd. posting very strong fourth-quarter results, which to somewhat allayed anxiety about a slowdown in North American drilling, lifted several oilfield marine names that have suffered at the hands of recent warnings. Hornbeck Offshore Services Inc. saw one of the biggest gains, but one trader likes Trico Marine Services Inc. in the group as a potential takeover target.

In bankrupt stocks, traders noted that Calpine Corp. resumed an upward path, widely attributed to buy-ins ahead of impending news on the San Jose, Calif.-based independent power company's search for an equity sponsor in its bankruptcy exit plan. Calpine shares (Pink Sheets: CPNLQ) gained 10 cents on the day, or 7.52%, to close at $1.43, after trading up to $1.46.

"I thought today's Calpine price would close at $1.50 or higher; I was close," one trader said. "I think Monday's close will be $1.60 or more. And, Tuesday will be the rocket ride to the moon - $1.90 or higher. The scuttlebutt is that there will be an announcement about the rights offering on Tuesday."

Elsewhere, Lamson & Sessions Inc. got a shot in the arm Friday from an activist stockholder move to get the company to sell its PVC pipe business, or the whole company. In a Securities and Exchange Commission filing on Thursday, affiliates of the hedge fund Ramius Capital Group LLC, Lamson's largest shareholder with a 9% stake, said it believes the company could get $70 million or more from the PVC unit alone.

Lamson shares (NYSE: LMS) advanced $1.35 on the day, or 5.74%, to settle at $24.85.

"Going out six months, the options activity says there is a strong line of thinking that the stock could go to $30," said one trader. "Given the surge in homebuilders stocks we saw today and the strong housing start numbers yesterday, this company could bring in some good bids."

Cleveland-based Lamson also makes electrical and electronic products such as outlet boxes and conduits. On Thursday, the U.S. Department of Commerce reported a surprise spike of 4.5% in November housing starts; many pundits had expected a flat or lower number.

ElkCorp seen hitting the roof

As for ElkCorp, another building-related company, several traders said there were people cashing out their profits in the stock as the bid ratcheted up to $42 per share from Building Materials Corp., which bests the latest bid of $40 per share from Carlyle.

Carlyle launched its tender offer at $40 per share, or $824 million, for Dallas-based ElkCorp., but Wayne, N.J.-based Building Materials Corp. immediately raised its offer to $42 per share, or $865.2 million. Last week, ElkCorp rejected a $40 offer from the latter.

ElkCorp shares (NYSE: ELK) on Friday ended off by 8 cents, or 0.19%, at $42.68 after making a big leap Thursday.

But the stock is up from around $25 a share in early November when Carlyle first made a move for the company, one trader pointed out.

"A lot of people are cashing out here," he said.

"At the rate we've seen these bidding wars escalate, it could go higher, but you see that it's made a gigantic run already so those odds may be against you right now."

Covanta better, timing cheered

On improved guidance for 2006 and 2007 from Covanta Holding Corp., the stock got a nice bounce Friday, and one trader said the stock may see another spurt as it implements an aggressive debt recapitalization plan also announced Friday.

Covanta shares (NYSE: CVA) gained 21 cents on the day, or 0.97%, to close at $21.87.

"It's about time," remarked one trader.

"We have been waiting for something like this for a while. I think the stock could see a little more interest on this. Of course, the stock will probably take an initial hit from the convertible bond and the secondary stock sale they are planning, but I would see that as a buying opportunity because once the recap is completed the company is looking a lot better."

The Fairfield, N.J., renewable energy and waste disposal company raised its 2006 free cash flow to a range of $250 million to $260 million from $235 million, and confirmed prior guidance for adjusted EBITDA of $535 million to $545 million and diluted earnings per share of about 75 cents. For 2007, contingent on the recapitalization, Covanta said it expects adjusted EBITDA of $545 million to $565 million, free cash flow of $290 million to $320 million and diluted EPS of 65 to 75 cents.

In the bank loan market on Friday, Covanta announced opening price talk of Libor plus 200 bps on its institutional bank debt as a bank meeting to launch the transaction was held early on in the session, according to a market source. The institutional debt is comprised of a $680 million seven-year term loan B and a $320 million seven-year synthetic letter-of-credit facility.

The company's $1.3 billion credit facility also includes a $300 million six-year revolver with a 50 bps commitment fee. There is a $400 million accordion feature under the credit facility. Financial covenants include a maximum leverage ratio, maximum capital expenditures and a minimum interest coverage ratio.

With part of the proceeds, the company plans to repurchase $612 million of bond debt of its subsidiary MSW Energy Holdings and Covanta ARC LLC. Closing the credit facility, however, is conditioned on raising at least $400 million but no more than $450 million of equity financing; along those lines, the company announced plans Friday to sell $325 million of convertibles and raise $125 million from a follow-on stock offering.

The convertible and stock are expected to price Thursday after the market closes.

The company plans to repurchase the 8.50% senior secured notes due 2010 of MSW Energy Holdings LLC, the 7.375% senior secured notes due 2010 of MSW Energy Holdings II LLC, and the 6.26% senior notes due 2015 of Covanta ARC LLC.

Hornbeck surges, Trico better

A spike in natural gas and oil prices helped several oilfield marine names that had been slammed over the past week by earnings warnings, lead by Hornbeck, traders said. Oilfield services giant Schlumberger's news didn't hurt, either.

"After the bad news the stock [Hornbeck] was punished so now it is trading with the pack," which is generally being steered by commodity prices, said one trader, noting that natural gas and crude oil were both higher in Friday's session.

"There could be another blip on the earnings, if they turn out better or worse than the company's guidance."

Hornbeck is expected to report earnings around the first week of February. In its reduced guidance last week, the Covington, La.-based company said it may adjust 2007 guidance by as much as 20% in mid-February if conditions do not moderate.

Hornbeck shares (NYSE: HOS) rose 75 cents, or 2.94%, to end at $26.30.

Hornbeck was largely blamed on the pullback in the sector when it lowered its fourth-quarter outlook; on that event the stock took a 20% hit. But it also sent Tidewater Inc. and other peers sharply lower, such as Trico, Seacor Holdings Inc. and Gulfmark Offshore Inc. Those all were getting lifted Friday as well, but another trader said Hornbeck was getting the most attention.

"The 20% dive was a bit overdone, even if they lower 2007 guidance," the trader said.

"The company is now trading at levels not seen since May of 2005. Normally the company had very strong support at $30 a share and bounced hard off those levels. The company, from a fundamental stand point, is very strong with over $75 million in free cash flow from operations over the last 12 months. The company's debt to cash and cash flow ratio is very manageable and operations are generating more than enough cash flows to pay the bills and grow shareholder wealth at the same time.

"This was a short-term setback and I think the Schlumberger news underscored that."

Trico is another stand-out in the pack, by a second trader's account, as a potential takeover target, but he acknowledged that the story is a little trickier. That stock also was hit hard by the Hornbeck news last week, he noted. On Friday, Trico shares (Nasdaq: TRMA) added 46 cents on the day, or 1.46%, to $31.93.

"Investors of Trico Marine are spooked by the downgrades of its competitors, so they're trying to pre-empt any pain that will come if Trico issues a profit warning, which would result in downgrades, pushing the stock even further down than they've pushed it," the trader said.

"The problem is, what happened last week sent the stock plummeting below all its previous support levels, so there's really no floor or price level to gauge when it would be safe to jump in. Trico is cheap, no doubt about that, but it will probably get cheaper before all is said and done. It's a possible takeover candidate in my book, though I would hold on buying this stock to see where the bottom is going to form and also to see if Trico has a warning of its own in the near future."

Trico Marine is expected to report earnings in early February along with most of its competitors.

XM, Sirius decline

XM Satellite Radio Holdings Inc. was sent reeling Friday by a ruling that its motion to dismiss a lawsuit brought against it by a cartel of recording labels would have to go to court, and Sirius Satellite Radio Inc. went along for the ride.

Both stocks have been whipsawed in recent months by persistent market chatter about a merger between the two satellite radio companies, but many onlookers are skeptical.

XM Satellite shares (NYSE: XMSR) fell 73 cents, or 4.44%, to close Friday at $15.72.

"The merger party is over. Now, reality sinks in. There is no merger. What we have is stinky car sales, stinky personal unit acceptation and a very limited target market," one trader said.

"A huge amount of this BS is entirely generated by the media. The companies have not even hinted that they are seriously considering or even lightly considering a merger. For the most part, I just think that the much talked-about merger is not really necessary for each company to survive. All they have to do is just keep costs under control, and do some proper advertising."

April Horace, an analyst at Janco Partners Inc., said if you believe the merger speculation, however, and want to play the volatility in the stocks, a long position in XM Satellite would be best.

The latest trade, though, suggests a negative view on both companies, largely because of declining vehicle sales, according to traders.

"Everyone is shorting these names," said a stock trader.

"Earnings is coming down the pike and it's not going to be pretty. The multiples of where XM and Sirius are trading makes them both look expensive vis-à-vis their guidance and the guidance from the automakers, so I agree that there's going to be some serious pullback ahead."

On XM Satellite, he said he would short the stock down to $15 over a one-year horizon. On Sirius, he pegs $2.50 as a lower threshold, but noted that there are some bullish players betting on the stock going to $5.

Horace said it could take a year for the merger speculation to play out, although she pointed out that it has been suggested the two companies would need to get started on the process fairly quickly, perhaps in the next couple of months.

From an operating standpoint, the analyst sees XM Satellite in a better position, noting that it has sealed up 60% of the LEM market share for satellite radios and has probably double the number of units in vehicles hitting the floor rooms in 2008 than Sirius.

XM Satellite is being sued by Atlantic Recording Corp., BMG Music, Capitol Records Inc. and other music distribution companies alleging XM directly infringes on their exclusive distribution rights by letting consumers record songs onto special receivers. XM has argued it is protected from infringement lawsuits by the Audio Home Recording Act of 1992, which permits individuals to record music off the radio for private use.

XM had moved to have the lawsuit dismissed, but the court ruled that the case must go to trial on Friday. However, many onlookers expect the company to settle beforehand, noting Sirius has settled with recording companies over the same issues.

Sara Rosenberg and Kenneth Lim contributed to this article

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