Synaptics improves on earnings jump; ON climbs outright on results, guidance; Dune to price Wednesday

By Kenneth Lim

Boston, April 27 - Synaptics Inc. gained with its stock on Friday as market activity centered on earnings news, although the convertible universe closed the week on a generally softer note.

ON Semiconductor Corp. also climbed outright in line with its stock after the company reported first-quarter growth and guided for a strong second half.

Meanwhile, Dune Energy Inc. has set price talk on its planned $140 million of convertible preferreds. Investors described the deal as appropriately cheap at first glance, given the high risk profile.

The overall convertible market continued to be weak, with recent gains in the equity markets hitting valuations.

"Today most things are in line and a touch heavier," a sellside convertible strategist said. "The last couple of weeks have been a little heavier overall. Stocks are improving on bonds. On average most things have been better for sale."

The strategist said the climbing equity markets, which hit record highs on Friday, were a major damper. Convertible holders now have to figure out when equity markets will come back down.

"Volatility comes in when the stock market comes on a straight line up," the strategist said. "I don't know when it's going to crack, but I think most guys are thinking that it's not a matter of if but when it cracks, whether it's two weeks or two months or two years. But when it does fall, volatility should pick up. Which is why the convertible product is an attractive place to be, but the last two weeks have been heavier."

Synaptics gains on earnings

Synaptics' 0.75% convertible due 2024 added about a point outright on Friday after the company reported a jump in fiscal third-quarter earnings and expanded a share buyback program.

The convertible traded at 92.75 against a stock price of $30.60. Synaptics stock (Nasdaq: SYNA) closed at $30.49, up by 4.56% or $1.33.

"Synaptics was up in line with the stock," a sellsider said. "It moved up on positive earnings, those are pretty active today."

Synaptics reported a fiscal third-quarter profit of $5.6 million, or 20 cents per diluted share, from $1.6 million, or 6 cents per diluted share, in the year-ago period. Excluding share-based compensation, net income was $8.1 million, or 28 cents per diluted share, more than the 23 cents per share expected by analysts. The Santa Carla, Calif.-based maker of user interfaces for electronics devices said it expects revenue to grow 55% to 61% year-on-year in the fiscal fourth quarter.

Synaptics also authorized the repurchase of up to $80 million more of its common stock, and exercised its option to settle in cash any conversions of the 0.75% convertible.

"It looked like a good quarter," a sellside convertible analyst said. "Probably what's more important is that they're also guiding for another two strong quarters."

The analyst said the company's dependence on Apple Inc.'s iPod business could be a risk for the credit, but not too much.

"They took a hit last year after they lost some of the iPod business to Cypress, but it looks like they managed to win some of the contracts back," the analyst said. "They've obviously been able to find new business and they've recovered well, so it's not really a big concern."

ON Semiconductor up on results

ON Semiconductor's 2.625% convertible due 2013 rose about 5 points outright on Friday after the company reported a 34% increase in its first-quarter profit.

The convertible was marked at 128.75 bid, 129.25 offered against the closing stock price of $11.16. ON stock (Nasdaq: ONNN) gained 7.51% or 78 cents.

Despite the climb, volume was light in the name.

"I can't remember seeing those things quoted for some time," a sellside convertible trader said.

ON reported a first-quarter profit of $54 million, or 18 cents per share, from $40.4 million, or 12 cents per share, in the year-ago period. Street estimates had the profit pegged at 18 cents per share. The Phoenix-based maker of power and data management semiconductors said the industry was hit by an inventory correction for the past two quarters, but added that the correction was almost over and the second half of 2007 should be strong.

Despite the outright improvement, a convertible analyst said the 2.625% convertible was not so attractive at the moment.

"To be honest I don't think the convertibles are that interesting any more," the analyst said. "At this stage you don't really have enough downside protection to do much with it."

The analyst said the convertibles are trading almost like shares at the moment.

"If you're hedged you're basically hoping for the stock to fall, but unless it falls back below the conversion price [of $10.50 per share] the bond floor here isn't going to do you much good," the analyst said. "And this stock looks like it may hold for at least the next two quarters based on guidance."

Dune sets price talk

Dune Energy's planned $140 million of convertible preferred stock is expected to price Wednesday with initial reactions describing the deal as cheap but highly risky.

The convertible is talked at a dividend rate of 10% and an initial conversion premium of 20%. Dune stock (Amex: DNE) closed at $2.48 on Friday, up by 1.22% or 3 cents.

Jefferies & Co. is the bookrunner of the Rule 144A offering.

Dune is concurrently offering $285 million of five-year senior secured notes. Both offerings are expected to close at the same time.

Dune, a Houston-based oil and gas exploration company, said it will use the proceeds from both deals to acquire all of the outstanding capital stock of Goldking Energy Corp. as announced on April 18. Any remaining proceeds will be used to pay for acquisition-related expenses and for working capital.

"Wow," a sellside convertible trader said. "Their market cap is $150 million, they're raising $140 million [in convertibles]. There's a lot of risk involved in a name like this."

"They're raising their entire market cap," the trader added. "That's got to be a really good acquisition."

A buyside convertible analyst said the risk involved made it necessary for the deal to be priced really attractively.

"The thing you got to remember is it's a very leveraged company and a very small company that basically bought someone else," the analyst said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.