Another Delayed Reaction on Lone Star Technologies (LSS)

By Dr. Duru written for One-Twenty

September 12, 2006

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Sometimes I have to really wonder about this market. For the second time in five weeks, it took an analyst to get the market truly excited about old news on Lone Star Technologies. This time, we got news (yesterda) that another of LSS's competitors, NS Group (NSS) was being acquired at a huge 39% premium to Friday's closing price. At least the market gapped LSS up but it sold off for the rest of the day. I guess you could say this was a quicker roundtrip than the exhiliration and then disappointment LSS suffered after the news of the big acquisition of Maverick Tube. But today, on a day when commodity stocks generally got slammed yet again, LSS soared based on a Bear Stearns upgrade to "outperform." Bear Stearns even provided a $60 price target for the end of the year which means a 20% return even from today's closing price. More specifically, Reuters reported the following:

"In a research note, the brokerage said the upgrade is based on the premiums paid for comparable companies in recent transactions and improving earnings outlook for Lone Star on completion of its investment in Hunan Valin Tube and Wire Co. Ltd., a seamless steel tubular plant in China. The brokerage raised its 2007 earnings per share estimates for the U.S. oilfield company to $6.05 from $5.20 to reflect the benefit of the Valin Tube and Wire investment on Lone Star's projected earnings."

And this I pulled from an AP report on the news:

"Analyst Robin Shoemaker said he expects Lone Star's earnings forecast to improve once it completes its planned investment in a Chinese steel tube company. Meanwhile, he said the Dallas company is ripening as an acquisition target in an industry recently big on consolidation....'Lone Star is now the only large remaining independent U.S. producer of oil field steel tubular products,' Shoemaker wrote in a client note. "An international steel company that wants to establish a presence in the U.S. -- which is the world's largest single market for oil field tubular products -- has only one option: Lone Star.'"

So this upgrade also includes news that is now a month old! Better late than never. And as more analysts join the bandwagon, I expect more investors to get convinced of the bullish story. In the meantime, for full disclosure, I unloaded my position into today's rally and took the profits off the table (see disclaimer here). I was very happy to nail yet another story ahead of increased analyst attention and take profits while commodities in general continue to get slaughtered. From a technical perspective, the stock is rallying right into some major resistance. But I will continue to stay on top of this one and look to buy any future dips. A continued rally over and above $55 or so may force my hand to get a bit more aggressive (I think a $60 target is very conservative and if/when commodities regain general favor, LSS should do the analysts one better). But we'll see how this one unfolds further.

In the meantime, be careful out there! It's not safe to be a commodity right now!

DrDuru, 2006