Paul Price

Bucyrus: Significantly Undervalued

Zacks now loves BUCY as a value selection...

Value: Bucyrus International Inc. September 24, 2009

Bucyrus International (BUCY) surprised on estimates for the second quarter in a row in July. Analysts forecast 10.6% year over year earnings growth in 2009 despite the global recession. BUCY isn't very expensive, trading at just 10.8x forward earnings.
Company Description

Bucyrus International is a manufacturer of high productivity mining equipment for the surface and underground mining industries.

The company has 2 divisions: surface mining and underground mining. Surface mining equipment is used for mining coal, copper, iron ore, and in the oil sands. Underground mining equipment is used for coal mining and mining minerals such as potash. The company also provides aftermarket services for its machines.

Bucyrus Surprised by 30.12% in the Second Quarter

On July 23, Bucyrus International reported second-quarter results which easily beat the Zacks Consensus Estimate by 25 cents. Earnings per share were $1.08 compared to the Zacks Consensus of 83 cents.

Sales rose 16.7% year over year to $724 million from $621 million in the year ago period. Both segments saw sales increases. Surface mining grew 8.1% year over year while Underground mining gained 16.7%. The increase in the Underground mining segment was mainly due to moderate increases in the longwall, room and pillar and belt systems product lines.

The aftermarket services segment also saw growth compared to the second quarter of 2008.

The company is feeling the recession however. New orders for both segments declined in most markets in the second quarter compared with the year ago period due to the current economic conditions.

Zacks Consensus Estimates Rise

Given the big beat in the second quarter, covering analysts moved to raise estimates for the third quarter and the full year.

Third quarter Zacks Consensus Estimates climbed 5 cents to 85 cents in the last 60 days.

Full-year Zacks Consensus Estimates rose 21 cents to $3.43 in the last 2 months with 1 analyst also raising estimates in just the last week.

Bucyrus is scheduled to report third quarter earnings on Oct 15.

Value Fundamentals

Bucyrus is a Zacks #1 Rank (strong buy) stock. It is trading with a price-to-book of 2.44. The company has a stellar 5-year average return on equity (ROE) of 23.30%.

As an added bonus, the company pays a dividend with a current yield of 0.30%.

Bucyrus: Significantly Undervalued

Bucyrus beats by $0.25, beats on revs; declares quarterly dividend of $0.025 per share (BUCY) 32.75 +1.71 :

Reports Q2 (Jun) earnings of $1.08 per share, $0.25 better than the First Call consensus of $0.83; revenues rose 16.7% year/year to $724.4 mln vs the $625 mln consensus. Gross profit for the second quarter of 2009 was $205.3 million, or 28.3% of sales, compared to $174.1 million, or 28.0% of sales, for the second quarter of 2008.

The increase in gross profit was primarily due to increased sales in both the surface and underground mining segments. Backlog stood at $1.98 bln ($1.22 bln over next 12 months), down 20% from end of FY08.

Bucyrus: Significantly Undervalued

Peter,

I never said there was no further MARGIN REQUIREMENT for the puts. Just that anyone with a decent size margin type account could use the paid-up equity to write against, rather than needing cash in the account per se.

If you have a $50 M or $100M or $1 MM dollar equity value account without current margin debt then you have plenty of put writing capacity that does not require more cash unless the puts are exercised. Even the you would have the choice of going "on margin" if you were willing to hold the shares via that route.

My cash-on-cash returns are exaxctly accurate if the combination works out where the puts go unexercised as clearfly noted in the theoretical "what if" scenarios.

I have also noted the obligation to buy a second equal share position if the stock is below the puts' exercise price.

Options use should only be done by those who understand how they work and how option margin requirements are calculated.

It is imposssible to figure ROI or ROE in advance as it is never predictable whether a particular put or call will be exercisable in the future.

That doesn't make it a bad strategy. You can't predict the ROI on a straight stock purchase until you know at what price you will finally sell it.

All my cash-on-cash projections are clearly the "Best Case" scenarios.

I always put in the "break-even" point on the whole trade to indicate the price at which the investor placing the trade would start to lose money.

In the BUCY example (above) the shares could drop up to 35% from their starting price before a loss would occur.

If you are not a believer that BUCY shares will hold at that level or above you should not do this trade.

Bucyrus: Significantly Undervalued

I didn't forget the margin requirement on the naked puts. That can be met simply by having other paid-up equity positions (or even t-bills) in the same account.

I simply stated the cash-on-cash return if the puts go unexercised over the full course of the transaction period. In that case there will never be any further cash actually deployed.

Figuring ROI on short options is never an exact calculation as you can't predict in advance whether calls or puts will be exercised or when that might happen. After the transaction is complete you can get a better feel for the annualized return.

Not knowing in advance what the ROI will be is neither good, nor bad, by itself. You just have to like the prospects for the trade based on your projected price for the shares and let things play out.

Bucyrus: Significantly Undervalued

Glen,

I agree that BUCY has very big upside and it might be better to wait in writing any calls until the share price is higher.

That said, when I write up a combination play here I like to show a complete trade that is actually available at the time I am posting. The cash-on-cash return in the example I gave would be a profit of $15,300 on an outlay of $4,700 - a gain of 325% (if the shares finish above $20 at expiration).

That's as good percentage-wise as a $62 share price on a straight purchase would have been with that $19 entry point.

Thanks for your comments. The format here is somewhat limiting.