Techs dominate convertibles market; Intel drops outright but expands on a hedged basis, AMD adds

By Rebecca Melvin

Princeton, N.J., Jan. 18 - In the wake of investor-rattling earnings from Intel Corp. and Yahoo! Inc., the convertibles market on Wednesday was dominated by activity in the technology sector, traders said.

The 2.95% convertibles of Intel traded down 6.5 points in heavy volume. But on a hedged basis, the bonds expanded slightly by about 0.375 point. Yahoo's 0% convertibles traded down about 22 points outright to 173. But those bonds didn't trade as actively.

A block of Credence Systems Corp. also traded but was little changed on the day, according to a Connecticut-based buysider.

"Technology just exploded in terms of flow," a New York-based sellside trader said. "There was lots of Intel. They started out about 94.5 and moved down. There was also a bunch of AMD."

Advanced Micro Devices Inc.'s convertibles, which have been called, traded about 6 points higher, strengthening throughout the day amid news that the company snatched market share from Intel and ahead of earnings expected after the bell.

There was some activity in telecommunications names, with Qwest Communications International Inc.'s convertibles trading at the upper end of their range at about 118.50. But the convertibles of Lucent Technologies Inc. were lower, in line with the company's shares.

Also trading actively were the convertibles of American Express, which were little changed to slightly lower, according to a Connecticut-based buyside trader.

Activity in the convertibles of biotechnology names on Wednesday was particularly thin, though stabilized, after profit-taking struck the sector at the end of last week.

"I didn't trade a single thing all day," said a Connecticut-based sellside trader, who focuses on the biotechnology sector.

"Biotech was slender, there was more a focus on technology," said one New York-based sellside trader. Another source said, "biotech was overshadowed by technology."

Any trades that were mentioned were mostly flat. Medimunne Inc.'s 1% convertibles traded little changed at 98, versus a share price of $33.70. In contrast its shares (Nasdaq: MEDI) regained 53 cents, or 1.57%, to $34.22 after slipping Tuesday amid no particular news.

In the wider health care space, Laboratory Corp. of America Holdings' 0% convertibles were mentioned in trade at a level little changed at 79.

Cephalon Inc., which ratcheted up in December and early January, saw a little trading of its convertibles on Wednesday, with its 2% bonds trading at 163.8, compared with trades a week ago at 170.5.

Eyes were on earnings reports expected after the bell, including those of Washington Mutual Inc. and Hutchinson Technology Inc., in addition to Advanced Micro's, according to one Connecticut-based sellside analyst.

Hutchinson reported after the close that its fiscal first-quarter earnings dropped by more than 50% amid slimmer margins even though sales increased. Its shares (Nasdaq: HTCH) dropped 2% in after-hours trading.

Washington Mutual, which acquired credit-card company Providian Financial last year, reported higher earnings but missed expectations. Its Providian convertibles have mostly been retired or converted. Its shares (NYSE: WM) dropped about 1.6% in after-hours trading.

Intel expands on a hedged basis

Investors reacted strongly to Intel's disappointing fourth-quarter sales and dim first-quarter outlook. The convertibles - which are little more than a month old, having been issued Dec. 14 - traded actively, closing out at about 93.50 bid, 93.75 offered, as its shares (Nasdaq: INTC) tumbled 11.45%.

At issue wasn't merely the earnings or AMD taking market share, according to one New York-based sellsider. "There looks to be a slowdown in end market demand. Asia was weak and the emerging markets are losing momentum."

Not that Wednesday's move was a bad thing for convertibles investors. "Tech stocks got ahead of themselves. It's great for converts as credit has seemed improved in the last few days," the sellsider said.

An analyst agreed: "Maybe this is the injection of volatility that we've been looking for."

But the fundamental impact for not only Intel, but for the whole sector is significant, sources said.

"Intel owns 90% of the chip market in PCs. This loss of market share to AMD isn't that important. Intel built too much for Christmas and with a build up of inventory among Intel customers, they're not going to buy from anybody," the New York sellsider said.

Intel reported a 16% rise in net income, but revenue fell short of the company's forecast, hurt by weaker prices and lower-than-expected shipments of PC chips.

Net income for the quarter ended Dec. 31 was $2.45 billion, or 40 cents a share, compared with $2.12 billion, or 33 cents a share, in the same period in 2004.

Revenue rose 6% to $10.2 billion, below the range of $10.4 billion to $10.6 billion Intel had forecast on Dec. 8. Intel officials said they overestimated the availability of chipsets. In addition demand for desktop PC chips softened in the quarter amid rising inventory at computer manufacturers, the officials of the Santa Clara, Calif.-based company said. They said the rise in PC chip supply will trim first-quarter sales.

Intel shares fell $2.92, or 11.45%, to $22.599.

AMD gains ahead of strong earnings

The 4.75% convertibles of AMD gained steadily on Wednesday to a close of about 146, up about 6 points from Tuesday, according to one sellside trader.

The bonds are callable, following on the heels of the Sunnyvale, Calif.-based company's call of its 4.5% convertibles. They are well in the money and their conversion price, at $23.38, is low, the sellsider said.

Its underlying shares are $10 higher than the conversion price, having closed up 51 cents, or 1.55%, at $33.37 on Wednesday (NYSE: AMD).

After the close, AMD shares jumped 11% in after-hours trading when the company reported that it had swung to a fourth-quarter profit amid strong microprocessor sales.

For the three months ended Dec. 25, AMD earned $95.6 million, or 21 cents per share, on sales of $1.84 billion. In the fourth quarter of 2004, it lost $30 million, or 8 cents per share, on sales of $1.26 billion.

The results include the results of AMD's flash memory joint venture with Fujitsu Ltd. before the company, Spansion Inc., went public on Dec. 20. The numbers also include a $110 million charge.

Excluding one-time items, AMD earned $205 million, or 45 cents per share, compared with a loss of $30 million, or 8 cents per share, in the same period of 2004.

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