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Bucyrus (NASDAQ:BUCY) serves the surface and underground mining industries through design and manufacture of draglines, electric shovels, rotary blasthole drills and underground coal mining systems. It also supplies replacement parts and service worldwide.

When the commodities boom was in effect, these shares were among the 'market darlings' with BUCY shares running up to $79.50 this past June. While hard asset prices (and the shares) have fallen back since then, the company's sales and earnings continue to hit record high levels. Since its IPO in mid-2004, growth has been spectacular.

At Monday's close of $19, these shares now trade at just 6.13x actual trailing earnings of $3.10/share and under 5x consensus estimates of $3.85 – 3.97 for 2009. Here are the per share numbers as reported by Value Line since they came public in July 2004. Data for 2008 includes estimates for Q4 (ending this month).

Year …… Sales ….. C/F ….. EPS …... Div …... B/V …... Avg. P/E

2004 …… 7.53 …... 0.42 …. 0.23 ….. 0.02 …. 2.77 …… 47.1x

2005 …… 9.31 …. . 1.10 …. 0.86 ….. 0.08 …. 3.58 …… 15.9x

2006 …… 11.69 …. 1.36 …. 1.12 ….. 0.10 …. 4.69 …… 20.7x

2007 …… 21.50 …. 2.57 …. 1.93 ….. 0.10 ….10.80 …... 17.5x

2008 …… 32.80 …. 3.95 …. 3.15 ….. 0.10 ….13.35 …... 13.1x

The balance sheet looks good with total interest coverage of 9.3x and almost no debt maturing in the next five years. The dividend payout ratio is only 3% leaving plenty of free cash flow for both cap ex and future expansion.

There have been three open market purchases of BUCY shares in recent months versus no insider sales. On September 12 – 550 shares @ $49.90, October 28 – 10,000 shares @ $18.60 and November 19 – 400 shares @ $19.72.

Even eight times expected 2009 earnings of $3.85 would brings these shares back to $30.80 or plus 62% from the current quote.

Is that a reasonable target price? BUCY shares hit peak prices of $30.40, $52.20 and $79.50 in 2006-2007-2008 when fundamentals were much less favorable than they are now.

For those of you comfortable with options, here is an option combination that makes sense to me:

………………………………….……...... Cash Outflow ……….. Cash Inflow

Buy 1000 BUCY @ $19 ……….……….... $19,000

Sell 10 Jan. 2010 $20 calls @ $6.70 …………………….……… $6,700

Sell 10 Jan. 2010 $20 puts @ $7.60 ……………………….……. $7,600

Net Out-of-Pocket Cash ………………….. $4,700

If BUCY shares are above $20 [+ 5.3% from today's price] on expiration date (Jan. 15, 2009):

  • Your $20 puts will expire worthless [a good thing for you- the seller].
  • You will own no shares and have no further option obligations.
  • Your $20 calls will be exercised.
  • You will deliver your 1000 shares and collect $20,000.
  • You will hold $20,000 for your original cash outlay of $4,700.

If Bucyrus shares are below $20 on expiration date, your puts would be exercised and you will be forced to buy an additional 1000 shares for a net cost of the $20 strike price less the $7.60 'put' premium = $12.40/share.

What's your break-even point on the whole transaction?

On the shares you bought to start, it's the original price of $19 less the $6.70 'call' premium = $12.30/share. On the second 1000 shares it the previously noted $12.40/share. You average net cost basis is thus $12.35/share or 35% below the price on the day you started this whole transaction.

Summary: A 5.3% (or greater) share price increase over the next 13 months would allow for the maximum profit on this combination. Even a 35% share price decline would not result in a loss.

Disclosure: Author is long Bucyrus shares and short Bucyrus options.

Source: Bucyrus: Significantly Undervalued