Bucyrus Is "Not As Pessimistic As Most, But Certainly Not Optimistic"

By Dr. Duru written for One-Twenty

Aug 18, 2009

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Mining equipment company Bucyrus International (BUCY) reported earnings the morning of July 24, 2009 (yes - I am a little behind reporting on this one!). In reaction, the stock sold off 12% over 4 days before recovering all those losses over the next 7 days. It has now fallen back all over again. The lack of direction in the stock price matches well with the push and pull between the uncertainty and promise that came out of the earnings conference call: a cautious management highlighted the potential for stabilization and improvement in the business, but they stopped short of declaring that a meaningful rebound is indeed underway.

For example, Timothy Sullivan, President & CEO, responded to an analyst's questions regarding normalized revenues and margins by explaining that "we're not as pessimistic as most but we're certainly not optimistic" and it is "anyone's guess" what specific revenues and margins will look like in the next two quarters. (We have frequently heard similar refrains during third quarter earnings season). Yet, Sullivan was also quick to point out that the aftermarket business could provide an upside surprise on margins and could help BUCY meet revenue targets: "...if the mix for '10 shifts more toward aftermarket, these EBITDA margins are just going to continue to go up...we want the OE business obviously to drive as much revenue as we can in '10, but if the OE is not as strong as we want then we can still leverage off of that large install base." (All quotes from the conference call come from Seeking Alpha's transcription.)

The analyst wanted to contrast and compare BUCY's business commentary with the commentary from competitor Joy Global (JOYG) two months earlier. The highlight that most intrigued me from JOYG's conference call was the expressed doubt regarding the sustainability of China's rapacious importing of commodities. I was disappointed that BUCY did not provide its own opinion on this process - the "China Story" represents the largest risk to my bullishness on commodities (and even indirectly my bearishness on the dollar). However, an analyst on the BUCY call claimed that "one of your customers was out a few days ago saying that China's inventory build is essentially complete but they're seeing evidence of restocking going on in the developed world." Sullivan punted on the question by explaining that BUCY had spent most of its recent time in the developing world and had little color on the developed world. Sullivan did serve up some other tidbits suggesting that commodities prices have bottomed:
  1. "we believe, and I think the reports that are coming out of South America in particular right now, believe that copper prices will hold up pretty well as we move through 2009 and into 2010."
  2. "The steel market seems to have bottomed internationally."
  3. "...very rapidly after the production pull-backs in the fourth quarter of 2008, we've seen a pretty substantial and well established pricing floor for most commodities. Most producers are still producing their products well above cash costs, with exception of some of the domestic producers in Central Appalachia."
All things considered, I am tempted to say that the market has priced in the best potential near-term outcome for BUCY, but the stock has sold for much higher ratios during its brief stint as a public company. One small red flag is that operating net cash flow has shriveled 96% year-to-date to $6.2M (as reported by Gridstone Research). The stock has hit a wall at the June highs around $34, is over 50% below last year's peak, and has run up 150% from the March lows. So perhaps BUCY is a buy on another substantial pullback. Regardless, I still prefer to buy the commodities before buying the extraction equipment.

Be careful out there!

Full disclosure: no positions. For other disclaimers click here.

DR. DURU®, 2009