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Apogee Enterprises. (NDQ:APOG) May 14, 2009: $11.85 9:45 AM EST

52-week range: $5.32 (Nov. 21, 2008) - $26.00 (Jun. 4, 2008)

Dividend = $0.815 quarterly = 2.75% current yield

Apogee has two main business segments. Architectural Products and Services represent about 90% of sales and 78% of income. Large-scale optical glass contributes about 10% of revenues and 22% of profits. A joint venture interest (in PPG Auto Glass) was sold recently generating about $27 million in cash proceeds.

Fiscal 2008 (ended Feb. 2009) marked the fifth straight year of improving sales and earnings due to the robust commercial construction market that persisted until last fall. The company projects revenues to be down at least 15% this year and earnings will likely fall even more.

Zacks and others now see about $0.95 for FY 2009 versus last year’s record EPS of $1.82. APOG shares seem to have already reflected this news having dropped from last June’s $26 peak to yesterday’s close of $11.99/share.

The company’s product line looks attractive. Apogee produces high-performance, value added glass and window products that can conserve energy and reduce heating and cooling expenses by up to 25% versus conventional building materials. As more ‘green’ projects come on stream demand should grow. Higher energy prices also bode well for the demand for Apogee’s money-saving materials.

The balance sheet is sound with total debt of just $8.4 million and cash of over $27 million. Fiscal year-end book value finished at an all-time high of $11.40 /share. Apogee has no defined pension plan so they have no underfunding worries.

The dividend was raised in each of the past seven years and is well covered at just 17.5% of last year’s and 34.2% of projected current year estimates. The current yield of 2.75% looks attractive in today’s low interest rate environment.

The key to playing cyclical stocks is to buy when earnings and margins are low in anticipation of the future rebound. I think Apogee is in the sweet spot right now with the shares already depressed in price.

Value Line sees 3 – 5 year earnings of $2.30 /share and a return to a 15 multiple. That would imply a $30 - $36 target price a few years out from today’s sub-$12 level.

If you want a short-term play that has excellent potential consider this:

If Apogee shares are $12.50 or higher on Nov. 20, 2009:

[up 5.5% from the current quote]

The $12.50 calls will be exercised.
You will sell your shares for $12,500.
The $12.50 puts will expire worthless.
You will have received at least $165 in dividends.
You will have no further options obligations.

You will hold no shares and $12,665 cash for your original $7,650 outlay.

That’s a best-case scenario net profit of $5,015 / $7,650 or + 65.5%.

Not too bad for a six month holding period and shares that only needed to move up by 5.5% from trade inception.

What’s the risk?

If Apogee shares are below $12.50 on Nov. 20, 2009:

The $12.50 calls will expire worthless.
The $12.50 puts will be exercised.
You will be forced to buy an additional 1000 shares and to lay out
another $12,500 cash.
You will have received at least $165 in dividends.
You will have no further options obligations.
You will end up with 2000 shares of APOG.

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

On the first 1000 shares it’s the $11.85 purchase price less the $1.70 /share call premium = $10.15 /share.

On the ‘put’ shares it’s the $12.50 strike price less the $2.50 /share put premium = $10.00 /share.

Your net average cost is thus $10.075 (not counting dividends).

APOG shares could drop by as much as $1.70 /share or (-14.3%) without causing a loss on this trade.

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

Source: Apogee Enterprises: Getting in Cheap Near Cyclical Lows