InterMune surges on trial data; Tesla, Chart Industries 'come in'; Stone Energy in line

By Rebecca Melvin

New York, Feb. 25 - InterMune Inc.'s 2.5% convertibles due 2018, which were 'busted' as of Monday, surged by about 50 points on Tuesday as shares of the Brisbane, Calif.-based biotechnology company surged 171% on news that its Esbriet lung disease drug successfully met endpoints in a phase 3 study and looks like it will be approved by U.S. regulators.

Tesla Motors Inc.'s convertibles surged on an outright basis but were seen to have contracted slightly on a dollar-neutral, or hedged, basis - depending on hedge - as shares jumped 14% on news of Morgan Stanley's new price target of $320 per share for the electric car make. The bank cited the chance that it may become a player in the electrical grid storage space as well as the auto industry for its share target hike.

After disappointing earnings, Chart Industries Inc.'s convertibles failed to expand with a drop in the underlying shares of the Garfield, Ohio-based engineering, procurement and construction company, a trader said.

But the convertibles of Stone Energy Corp. slipped outright, but held in at the unchanged mark on a dollar-neutral basis, after the Lafayette, La.-based oil and natural gas company reported disappointing earnings late Monday.

"It's been trading really well, especially into earnings," a syndicate source said of Stone Energy's convertible.

Overall, the convertibles market was mixed along with the underlying equity markets, which ended flat to lower after trading mixed during the session.

The market seems to be "a stock picker's market even in converts," a New York-based trader said.

Market tone was quiet or dull even though trading volume has picked up from the depressed levels of last week during the holiday-shortened week, but new issuance was still not forthcoming.

"A lot of guys are looking for [new] deals," the trader said.

InterMune skyrockets

InterMune's 2.5% convertibles due 2018, or the company's newer convertible, traded very actively up to 137.25 at the market close versus an underlying share price of $37.80. Previously the bonds were trading in the 80s.

Shares catapulted up by $23.84, or 171%, on Tuesday.

Early in the session, the bonds were up near 130 from a level in the 80s on Monday. On Feb. 3, the bond traded at 85.5 bid, 86 offered with the underlying share price at about $12.00. Early Tuesday, the shares were already up 155%.

"ITMN looks like a win all around," a Connecticut-based analyst said.

A second source said, "If any holders had a hedge on, it was probably on the light side, so I would say it's good for anyone involved."

The older InterMune 2.5% convertible due 2017 also traded, but not as actively, and those in-the-money converts ended the day at 253, according to Trace data.

The newer bond, which was busted prior to the news, or traded with no equity sensitivity, was likely to be hedged up to trade on swap at the new elevated level.

Tesla slips on hedge

Tesla's 1.5% convertibles due 2018 traded late in the session at 205.375 versus an underlying share price of $247.00. The bonds had last been around 185.

Tesla shares surged $30.35, or 14%, to $248.00 at the close.

The bonds gained about 20 points on an outright basis but slipped on a dollar-neutral basis depending on the delta hedge.

They probably came in about 0.25 point, assuming a delta of about 90%, a New York-based trader said.

"The stock moved up so much," he said by way of explanation.

Stone Energy unchanged

Stone Energy's 1.75% convertibles due 2017 traded down about 3 points on an outright basis to about 113.5, but that was in line, or unchanged, versus the underlying shares, assuming a delta of roughly 50%, a New York-based syndicate source said.

Stone Energy's shares fell $1.55, or 4.1%, to $35.08 on Tuesday.

"They are trading really well," the syndicate source said.

"The stock price moved down, and the bonds did too a little bit, but they were unchanged on a dollar-neutral basis. They are roughly in line to a little better," he said.

Stone Energy reported fourth-quarter earnings after one-time items of $1.75 million, or 4 cents a share, compared to $44.25 million, or 89 cents per share, for the fourth quarter of 2012.

Revenue decreased nearly 8% to $234.10 million and missed estimates. The company cited lower price realizations for the weaker results.

For the full year, Stone earned $2.88 a share, down from $3.03 one year earlier. This also missed the consensus estimate of $2.94.

Revenue for the year totaled $974.2 million, a 2.4% increase from $951.5 million one year ago.

The company also provided an update on its Cardona drilling project, of which Stone operates and owns a 65% interest.

Chart 'doesn't expand'

Chart Industries' 2% convertibles due 2018 ended the session around 137.875 with the underlying shares at $81.36, a New York-based trader said.

The shares fell $8.68, or 9.6%.

"The stock tanked and the bonds didn't expand," a trader said. "[The market] is not easy right now."

Chart reported fourth-quarter earnings that missed earnings by a penny and missed on revenue. Looking ahead it guided full-year earnings and revenue below consensus estimates.

Net income for the fourth quarter of 2013 was $23.2 million, or 71 cents per share.

These earnings would have been 82 cents per share excluding $3.2 million, or 7 cents per share, of costs largely associated with the AirSep acquisition, as well as a 4-cent-per-share impact associated with Chart's convertibles, according to the company's release.

This compared with net income of $20.8 million, or 69 cents per share, for the fourth quarter of 2012. Fourth-quarter 2012 earnings would have been 80 cents per share excluding $4.5 million, or 11 cents per share, of acquisition-related costs in that period.

Revenue was essentially unchanged at $303.8 million.

Chart's average fourth-quarter common stock price exceeded the convertibles' conversion price of $69.03 and Chart's warrants' strike price of $84.96.

"This resulted in the inclusion of an additional 1.9 million shares related to the notes in the company's diluted earnings per share calculation for the quarter. The associated hedge, which helps offset this dilution, cannot be taken into account under Generally Accepted Accounting Principles.

If the hedge could have been considered, it would have reduced the additional shares by 1.2 million, resulting in the inclusion of only 0.7 million additional shares related to the notes, according to the release.

Although the notes remain convertible at the option of the holders during the current quarter, there have been no conversions to date.

Looking ahead, the company says that for full-year 2014, revenue will be between $1.3 billion and $1.35 billion with earnings of $3.10 per share to $3.50 per share. That compares to estimates of revenue of $1.37 billion and earnings of $3.73 per share.

Mentioned in this article:

Chart Industries Inc. Nasdaq: GTLS

Goldcorp Inc. NYSE: GG

InterMune Inc. Nasdaq: ITMN

Stone Energy Corp. NYSE: SGY

Tesla Motors Inc. Nasdaq: TSLA

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