Tutor Perini: Constructing an Option Play

Nov.17.09 | About: Tutor Perini (TPC)
Tutor Perini Corporation (NYSE:TPC) offers diversified general contracting, construction management and design-build services to private clients and public agencies throughout the world. It provides general contracting, preconstruction planning and project management services, including the planning and scheduling of the manpower, equipment, materials and subcontractors required for a project. TPC also offers self-performed construction services including site work, concrete forming and placement, steel erection, electrical and mechanical, plumbing and heating, ventilation, and air conditioning (HVAC).
TPC shares have retreated from a 52-week high of $26.60 to Tuesday’s quote of $17.40, making them attractive again. An all-time high of $75.43 was hit during 2007 when better economic times permitted record EPS of $3.54.
In reporting Q3 earnings of $0.54, TPC management indicated expectations of $2.60 /share for 2009 and $2.40-$2.60 for 2010. Government sponsored projects will likely provide about 40% of 2010 revenues versus 20% of this year’s due to increased stimulus- related projects.
Here are the per share numbers from past years as reported by Value Line:
Year
Sales
C/F
EPS
B/V
Avg. P/E
2004
73.01
1.55
1.39
6.34
9.9x
2005
66.58
0.37
0.20
6.86
NMF
2006
114.59
1.85
1.54
9.18
17.2x
2007
171.50
3.94
3.54
13.65
13.9x
2008
117.14
1.72
2.07
23.56
14.3x
Click to enlarge
At the current price, TPC trades for just 6.7x this year’s and < 7.3x the low-end estimate for 2010. It doesn’t seem farfetched to expect TPC shares could again trade for about 10x the $2.40 estimate for 2010 bringing a 12-month price target about 38% above the current price.
Is that a reasonable goal? TPC has actually changed hands at $26.60 during 2009 and hit peaks of $27.30, $33.47, $75.43 and $44.80 during the calendar years 2005, 2006, 2007 and 2008, respectively. Earnings are higher now than in any of those years except 2007 (when the price was as much as 4x higher than today).
Standard and Poors gives TPC its highest ranking for ‘Fair Value’ at 5+ (on a 1- 5 scale) and calculates a $24.90 target based on their 2010 estimate of $2.51/share.
As of June 30, 2009 long-term debt was just 13% of capital and treasury cash equaled more than twice total debt.
If you’re comfortable with options you might consider this five-month play for a nice total return even if the shares do very little between now and next April.
Cash Outlay
Cash Inflow
Buy 1000 TPC @$17.40 /sh.
$17,400
Sell 10 Apr. $17.50 Calls @$2.30/sh.
$2,300
Sell 10 Apr. $17.50 Puts @$2.35/sh.
$2,350
Net Cash Out-of-Pocket
$12,750
Click to enlarge
If TPC shares merely creep above $17.50 (+1%) before April 16, 2010:
  • The $17.50 calls will be exercised.
  • You will sell your shares for $17,500.
  • The $17.50 puts will expire worthless.
  • You will end up with no shares and $17,500 in cash.
  • You will have no further option obligations.
That best-case scenario result would be a $4,750 profit on a net cash outlay of just $12,750 for a cash-on-cash profit of 37% over the approximately 5–month trade horizon.
That would occur on any move of 1% or better from the $17.40 starting price.
What’s the risk?
If TPC shares remain < $17.50 on April 16, 2010
  • The $17.50 calls will expire worthless.
  • The $17.50 puts will be exercised.
  • You will be forced to buy another 1000 TPC shares.
  • You will need to lay out an additional $17,500 in cash.
  • You will have no further option obligations.
  • You will end up with 2000 shares of TPC.
What’s the break-even on the whole trade?
On the original 1000 shares it’s their $17.40 purchase price less the $2.30 /share call premium = $15.10 /share.
On the ‘put’ shares it’s the $17.50 strike price less the $2.35 /share put premium = $15.15 /share.
Your overall break-even would be $15.13 /share.
TPC shares could fall be up to $2.27 /share (-13%) without causing a loss on this trade.
Disclosure: Author is long TPC shares and short TPC options.