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Anixter International (NYSE:AXE) April 27, 2009: $36.30

52-week range: $20.97 (Nov. 21, 2008) - $75.07 (Sep. 2, 2008)

Anixter is the world’s largest distributor of communication products, wire and cable. They also distribute small electrical parts to OEM manufacturers. 2008 revenues came in at an all-time record $6.136 billion. AXE maintains about 20% worldwide market share with around 70% of sales coming from North America, 21% from Europe and 9% from Asia and Latin America.

The global economic slowdown has hurt sales and earnings since they peaked in 2007. EPS dropped from $6.00 to $5.07 from 2007 to 2008.

A further contraction to about $3.72 is expected for this year.

So why be interested in Anixter right now? Because the share price has already reflected the bad news. AXE traded as high as $75.07 just last September and touched $88.40 at their peak in 2007. At today’s $36.30 the shares are just 9.8x the already reduced 2009 estimate and only 1.23x year-end 2008’s book value.

When economic times were better AXE often traded at 15x earnings and double to triple book value. While I don’t see a near term catalyst to make Anixter surge higher, I also see little risk of a major decline.

Value Line uses an 11 multiple in figuring their 3 – 5 year projections. Even eleven times the $3.72 projection would bring AXE shares back to $40.92 by year end. Morningstar calls ‘fair value’ at $42.

Here’s what looks like a great play even if you think AXE will just ‘hang around’ through next January:

If AXE shares stay above $35 through expiration date on January 15, 2010:

Your $35 calls will be exercised.

You will sell your shares for $35,000.

Your $35 puts will expire worthless.

You will have no further option obligations.

You will hold no shares and $35,000 for your original $22,400 outlay.

That’s a best-case scenario profit of $12,600 (+56%) achieved in less than nine months on shares which did not have to go up at all from the trade’s inception.

In fact, you make that 56% cash-on-cash return if the shares climb, stay unchanged, or even if they drop by $1.30 (-3.6%) back to $35.

What’s the risk?

If Anixter stays below $35 on expiration date:

Your $35 calls will expire worthless.

Your $35 puts would be exercised.

You will be forced to buy another 1000 shares and to lay out an

additional $35,000 cash.

You will own 2000 shares of AXE.

What’s the break-even on the whole trade?

On the original shares it’s the $36.30 purchase price less the $7.70 /share

call premium = $28.60 /share.

On the ‘put’ shares it’s the $35 strike price less the $6.20 /share option premium = $28.80 /share.

Your net break-even price is the average of those = $28.70 /share.

AXE could fall by as much as $7.60 /share or (-20.9%) without you suffering a loss.

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

Source: Anixter International: The AXE Has Fallen - Opportunity Awaits