Juniper zooms 30-plus points on positive earnings; several techs, telecoms join the party

By Ronda Fears

Nashville, Jan. 16 - Juniper Networks stole the show Friday after reporting a big turnaround in its operations the night before, and several networking, optical and network software names in the convertible universe joined in the celebration.

For most of the day, dealers said trading was very active, although more so in the morning, on the heels of Juniper's news.

Juniper's newest convertible, the 0% due 2008, skyrocketed more than 30 points after the company reported a profit of $39 million for 2003 compared with the $120 million loss in 2002.

Nortel Networks Corp. also shot up. So did optical firms like JDS Uniphase Corp. and Lucent Technologies Inc. Network software firm Manugistics Group Inc. also joined in the party.

"Just about all the tech and telecom names were on higher ground today," said a convertible dealer.

"There were two chickens in every pot," he added, seeming to imply that investors couldn't get enough of the paper.

Elsewhere, several power issues were on the rise as El Paso Corp. announced the sale of 25 power plants by its merchant energy unit for $746 million, plus the assumption of some $174 million in non-recourse debt. Calpine Corp. and Reliant Resources Inc. convertibles both added 2 to 2.5 points, while El Paso gained about 0.5 point.

Biotech issues were another space where the market was bullish, dealers said, but tech and telecom was center stage as industry pundits chattered on about the turnaround for those groups.

Juniper party lifts networkers

Juniper's turnaround was apparent, but small, and many onlookers were already believers in that story. As for extrapolating it to the entire networking group and beyond, there are some skeptics. Nonetheless, traders said it was a good exercise and generated a great deal of flow in convertibles.

Late Thursday, Juniper reported a 33% gain in fourth quarter net revenues to $207 million from $155.3 million a year ago. Net income was $14.7 million or 4 cents per share compared with net income of $8.5 million or 2 cents per share a year before.

Net revenues for the year ended Dec. 31 came to $701.4 million, up 28% from $546.5 million for 2002. The company posted net income of $39.2 million or 10 cents per share, reversing a net loss of $119.7 million or 34 cents per share for 2002.

The Juniper 0% convertible gained more than 30 points to close Friday at 163 bid, 164 offered. On swap, though, a sellside trader said the bonds probably were about a half point tighter.

"I don't know if it's a bellwether [for the networking group], but certainly this gives people reason to look at some of the other names in this space," said a convertible trader at a huge sellside shop.

"It's like anything that has survived the last couple of years, if they've made it they're doing pretty good."

A buyside convertible trader said it was no surprise to see Juniper make a strong turnaround.

"We've always liked them because they had so much cash," he said, noting that the company has been buying back its 4.75% convertibles so they are hovering around par.

"Juniper has been one of the more severely misunderstood, underestimated credits out there."

As for beyond Juniper, he said, "You cannot follow the herd. You have to take each company on its own."

A sellside analyst said that although Juniper reported results well ahead of estimates, it seems that most of the upside had largely been priced into the stock during its recent run. While Juniper may be well positioned to grow at the high end of the IP networking industry, the analyst noted that Juniper shares are trading at a premium to market giant Cisco.

There may be more room for improvement in some of the more battered names like network software maker Manugistics Group Inc., the sellside trader said, but it is tough in the convertibles except as pure credit plays.

"Manugistics has really had their own struggle," the trader said.

"The [Manugistics] bonds are at 99 to par and the premium is like 400% so the stock could quadruple before these bonds move. And, if you think the stock is going to do that, then you need to be owning the stock."

The buyside trader agreed, adding that because so many of the tech and telecom converts are busted, outright convertible players have more opportunity to boost returns than some of the hedge funds.

Convert guys alike seek delta

Outright convertible players are looking for delta in order to participate in the bull stock market, while hedged players want low premiums for insulation against any downdrafts.

"Hedge guys have got to set up so they have issues with low premiums, so that if things crack, they can make money on the downside," said Jeff Seidel, head of U.S. convertible research at Credit Suisse First Boston.

"For outrights, I just say pick your stock."

There is not so much interest rate anxiety, he said, as ongoing concern about common stock dividends getting bumped up - perhaps more so now that profits are returning.

"I don't think people are worried about interest rates," Seidel said. "I don't see anything like 1994 where you had seven rate hikes."

The sentiment that the Federal Reserve is bent toward a rate hike more than an easing, however, has made floating-rate convertibles more popular of late, he said.

Traders have noted this week activity in several floating-rate convertibles, such as Wyeth.

Dividend concern began in early 2003 on new legislation that made it more appealing for companies to raise common stock dividends. That has continued into 2004, and now more instances of profits have perhaps boosted some of the nervousness among convertible holders.

But if an investor is willing to buck the conventional wisdom in the convertible market that tags an issuer as being likely to boost its common dividend, then they can find some bargains. The vast majority of new issues brought to market in the second half of 2003, and currently, have dividend protection for convertible holders.

"There is a dichotomy in the convertible universe right now, between those issues that have dividend protection and those that don't," Seidel said.

"Those that don't are the few convertibles that are trading at a discount right now."

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