Intel gains despite forecast cut; SanDisk, Micron slip on reports; Transocean up with market

By Kenneth Lim

Boston, Aug. 27 - Intel Corp. rode a broad equity rally higher on Friday to overcome early weakness after the company warned that it would miss third-quarter sales estimates.

SanDisk Corp. was not as lucky, and the name continued to drop on reports that prices for one of the company's core chips have been falling.

SanDisk rival Micron Technology, Inc. did slightly better, although its convertibles also saw some resistance due to the same concerns.

The convertible market in general had a positive session to end the weeklong slump, in line with a broad-based surge in underlying equities.

"More gainers than losers today," a sellside trader said. "The GDP revision wasn't as bad as people thought, Bernanke's speech was reassuring. There's a positive tone entering the weekend."

Transocean Ltd.'s 1.5% series A convertible due 2037 was slightly better on the day in line with its stock, which has been volatile the past few months amid ongoing investigations into the company's role in the Gulf of Mexico rig explosion in April.

The convertible was marked at 96.25 outright, up by 1 point, the trader said.

Intel overcomes warning

Intel's 2.95% convertible due 2035 gained ¼ point on Friday to trade at 98 against a common stock price of $18.37.

The shares closed at $18.37, higher by 1.05% or $0.19.

Intel is a Santa Clara, Calif.-based chip maker.

"Saw a fair amount of Intels trading today," a convertible trader said. "They were down early because of the warning, but it got pulled up in the afternoon because of the equity rally."

Intel on Friday said it expects third-quarter revenue of $10.8 billion to $11.2 billion, down from its earlier forecast of $11.2 billion to $12 billion. Analysts had been expecting sales of about $11.5 billion.

"Revenue is being affected by weaker than expected demand for consumer PCs in mature markets," Intel said in a press release.

The trader said the market was surprised by the size of the cut.

"The economy hasn't been doing well, so the fact that their sales are going to be on the low end isn't a surprise," the trader said. "The surprise is that they're lowering their forecast by so much."

The convertibles improved slightly on a hedged basis in the morning, when the common stock dipped to as low as $17.81, but fell back in line later in the day as the shares recovered. There was also a brief trading halt on Intel stock in the morning when a few erroneous trades were eventually canceled.

"It was the rising tide lifting all boats today," the trader said. "Can you imagine at 10:30 a.m. people are dumping this, then a couple of hours later the same people are busy trying to buy it back?"

The stock and the convertibles are probably safe for now, the trader added.

"There was definitely some over-reaction this morning with the warning and the economy complicating things, but I think the market was quick to recover from that, and it looks stable now," the trader said.

SanDisk falls further

SanDisk's new 1.5% convertible due 2017 fell 1.5 points outright to trade at 90 versus a common stock price of $34.75.

SanDisk, a Milpitas, Calif.-based flash memory company, saw its common stock drop 4.44% or $1.59 to close at $34.19.

"Tough week for SanDisk," a sellsider said.

There were reports during the week that prices of a type of flash chip that SanDisk produces have fallen sharply, the sellsider said.

"Someone at BofA/Merrill said prices of their chips have fallen 20% in the quarter," the sellsider said. "Most of what SanDisk sells are those types of chips, so the market's pretty concerned about that. It's a tough stock story right now."

The sellsider added that Intel's forecast cut also added to investors' pessimism about SanDisk.

"The picture that's being painted is one of very weak demand in the last quarter and possibly this quarter as well," the sellsider said. "That's putting a lot of pressure on the stock, and the convertibles are suffering as well because of that."

Hedged investors could take some consolation from the fact that the credit has held up relative to the stock.

"It depends on how you were hedged, but in general I would say the bonds have been better dollar-neutral," the sellsider said.

Micron dips with stock

Micron's 1.875% convertible due 2014 was also hit by the same concerns that pressured SanDisk.

The convertible was marked at 86.875 bid, 87.375 offered against a common stock price of $6.75 early Friday.

"Same story in Micron," the sellsider said. "But I think Micron's exposure to those chips isn't as high as SanDisk's so on the day it looks like Micron actually came out a little better."

Micron is a Boise, Idaho-based maker of memory chips.

Mentioned in this article

Intel Corp. Nasdaq: INTC

Micron Technology, Inc. Nasdaq: MU

SanDisk Corp. Nasdaq: SNDK

Transocean Ltd. NYSE: RIG

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