SanDisk, Informatica crumble on guidance; Synaptics gains on results; Continental climbs on upgrade

By Kenneth Lim

Boston, Oct. 20 - The convertible bond market was active for a Friday as earnings-related news kept investors busy, with technology-related names dominating trading after a number of companies posted results.

SanDisk Corp. was among the biggest outright losers on Friday after the company said flash memory prices were expected to continue falling in the fourth quarter. On a dollar-neutral basis, however, the convertible was flat to slightly better.

Informatica Corp. was also lower after missing estimates for its third quarter and its fourth-quarter forecast.

Synaptics Inc. headed higher on the back of a strong quarter that came in better than expected, with the company guiding for an even stronger quarter to end the year.

Beyond tech plays, Continental Airlines Inc. rose on renewed optimism about the airline's prospects, with credit ratings agencies improving their views on the company.

Amid all the earnings-related activity, rumors emerged of a large convertible bond offering in the pipeline coming from the healthcare sector.

"We've heard some speculation that there's a huge deal," a sellsider said. "Nobody's confirmed anything yet."

A convertible bond trader quipped that the rumor may have been self-propagating.

"Maybe it's the cat chasing its own tail," the trader said.

Techs tumble on guidance

SanDisk and Informatica saw their convertibles lose several points on Friday after they provided guidance that spooked investors.

SanDisk's 1% convertible due 2013 dropped about 10 points outright, trading at 91.625 against a stock price of $48.875. SanDisk stock (Nasdaq: SNDK) closed at $49.15, a loss of 20.39% or $12.58.

"It was still a good quarter, but they came out short of estimates," a sellside convertible analyst said. "They got whacked, although if you're hedged I guess you came out OK."

Milpitas, Calif.-based SanDisk on Thursday reported third-quarter net profit of $103.3 million, or 51 cents per share. That was almost 4% lower than the year-ago profit of $107.5 million, or 55 cents per share, although earnings before items beat Street estimates. The maker of flash memory said unit prices fell 25% over the third quarter, steeper than the 19% the company had forecast. The company expects prices to continue falling in the fourth quarter, but at a slower rate of 15% to 20%.

SanDisk needs to address those falling prices and may have to step up development of new products, the analyst said.

"The concern is that it's going to go the way of DRAM [memory] and going to become just another commodity product if the rate of decline continues to steepen," the analyst said.

Informatica also took a beating on Friday, with its 3% convertible due 2011 sliding about 6 points outright to 96.5 versus a stock price $11.85. Informatica stock (Nasdaq: INFA) fell 10.54% or $1.44 to close at $12.22.

"The stock was down, they disappointed on guidance for the fourth quarter and '07," a convertible bond trader said. "Generally speaking, I think most tech names today aren't doing very well."

Redwood City, Calif.-based Informatica said Thursday that its third-quarter profit rose 13% to $9.4 million, or 10 cents per share, from $8.3 million, or 9 cents per share, a year earlier. But the data integration software developer forecast fourth-quarter earnings of 16 to 18 cents per share and full-year 2007 profit of 53 to 58 cents per shares. Analysts were expecting 17 cents per share for the fourth quarter and 62 cents per share for 2007.

The convertible analyst said the selling in SanDisk and Informatica was partly due to a jittery market.

Of SanDisk, the analyst said "there's pretty decent growth there and the stock's not at a real high multiple, but it doesn't seem like people are very eager to pay up for growth in this business."

"Everyone is so gun-shy with tech, if they give good guidance but miss on their earnings, or if they exceed expectations for the current quarter but guidance is weaker than expected, or if they give good profit guidance and report stronger than expected earnings, but miss on the guidance for revenue, it's going to get whacked," the analyst said. "Wherever the weakness comes from, people are going to look for it.

"If you're hedged, that's fine for you, of course," the analyst added.

Synaptics climbs with outlook

Synaptics' 0.75% convertible due 2024 rose about 2 points outright on Friday after the company beat estimates and raised its forecast.

The convertible was marked at 88.5 bid, 89.5 offered against a stock price of $26.25. Synaptics stock (Nasdaq: SYNA) closed at $28.06, a 16.48% or $3.97 gain.

Santa Clara, Calif.-based Synaptics late Thursday said net profit for its fiscal first quarter, which ended September 30, fell to $4.1 million, or 15 cents per share, from $5.5 million, or 20 cents per share, a year ago. Excluding compensation expenses, profit was 23 cents per share, a couple of pennies above Street expectations of 21 cents per share.

Synaptics, which makes control interfaces for electronic devices such as MP3 players, also raised its outlook for fiscal 2007 revenue, to between $230.7 million and $239.9 million, above analysts' estimates of $222.5 million.

"The key here is these guys, even though the company on the call didn't say anything about the Apple business, the reason why they did as well as they did suggests that they've gotten more Apple business," a sellside convertible bond trader said. Synaptics makes the touchpads on Apple's popular MP3 players.

"The stock will move on any Apple news," the trader added. "It's a headline trading stock. The credit of the company is pretty good, so it's a great convert arb situation. It's volatile, got a good credit, and it's relatively short-dated. There's just not a whole lot of bad parts about this. The only drawback is that the coupon is a little low."

Continental climbs with upgrades

Continental Airlines' 4.5% convertible due February 2007 rose slightly on Friday amid renewed optimism about the air carrier following its strong quarterly results.

The convertible traded at 101.5 versus a $32.625 stock price. Continental stock (NYSE: CAL) closed at $35.05, up by 7.35% or $2.40.

"Airline stocks continue to do well," a sellside convertible bond trader said. "Fuel costs have fallen and the airlines have been trying to rein in capacity, and I think with the good results by Continental and American this week investors are starting to feel better about the sector."

Houston-based Continental on Thursday said third-quarter net profit rose to $237 million, or $2.17 per share, from $61 million, or 80 cents per share, year-on-year. The latest third quarter numbers include a one-time $92 million gain from the airline's sale of a stake in Copa Airlines.

Fitch Ratings on Friday upgraded Continental' issuer default rating to B- from CCC, and it senior unsecured debt rating to CCC with a recovery rating of RR6 from CC. The outlook is stable.

Fitch cited the company's latest results, an improved cash flow outlook for 2007 and a stronger balance sheet for the move.

Fitch's upgrade came a day after Standard & Poor's raised the carrier's outlook to stable from negative. S&P affirmed its B long-term and B-3 short-term corporate credit ratings on the airline.

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