November 5, 2009
Research Analyst: Tanuka De, M.Com, MBA
Sr. Ed.: Ian Madsen, CFA; ; 1-800-767-3771, x9417
111 N. Canal Street, Suite 1101Chicago, IL60606
Bucyrus International, Inc. / (BUCY-NASDAQ) / $45.97*Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 3Q09 Earnings Update
Prev. Ed.: 2Q09 Earnings Update, September 16, 2009 (broker material was considered till September 4, 2009)
Brokers’ Recommendations: Positive: 57.1% (8 firms); Neutral: 42.9% (6); Negative: 0.0% (0) Prev. Ed.: 6; 6; 0
Brokers’ Target Price: $59.37(↑by $20.62from the last edition; 9 firms) Brokers’ Avg. Expected Return: 29.2%
*NOTE: Though dated November 5, share price is as of November 2; brokers’ material is tillNovember 2.
Note: A Flash Update on 3Q09 Earnings was done on October 22, 2009.
NOTE: The tables below (Revenue, Margins and Earnings per Share) contain less broker material than the broker material used in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.
Portfolio Manager Executive Summary
Bucyrus International, Inc. (BUCY or the Company) is a world leader in the design and manufacture of high productivity mining equipment for surface and underground mining. Its surface equipment is used for mining coal, copper, iron ore, oil sands and other minerals, and underground equipment is used primarily for mining coal. In addition to machine manufacturing, BUCY manufactures high-quality OEM parts and provides world-class support services for its equipment.
Of the 14 firms covering the stock, 57.1% hold a positive stance while the remaining 42.9% are neutral on the stock. None of the firms assigned a negative rating. 9firms provided target priceswhile 5came up with valuation metrics. Neither the firm with the lowest target price of $39.34 nor the firm with the highest target price of $75.00 provided any valuation metric but both rated the stock positive.
Positive or equivalent outlook –Eight firms or 57.1% - Target prices in the $39.34-$75.00 range: The firms remain positive on BUCY, as the fundamentals of its commodities end markets appear to have stabilized in many cases. Firms noted that many commodity prices are above the cash costs of production, with the notable exception of Central Appalachia coal. The recovery seems to be led by China, as infrastructure spending there is expected to rise significantly amid government stimulus initiatives. Firms remain encouraged bysigns of a gradual recovery in some international marketssuch as copper, met coal, and oil sands, butremain cautiously optimistic given the still-weakdomestic market and overall mining capex reductionsin FY09.
Firms noted despite moderation in BUCY’s heavy mining equipment products demand, its large backlog provides visibility with accelerating margins. Although thermalfundamentals are still weak in the Atlantic market, production has been resilient inthe Pacific; firms expect Atlantic production should bottom in 2009 before gradually increasing in 2010. Copper is still expected to be supply-constrained over the nextfew years, with the industry already operating at close to effective capacity. Overall, the bullish firms have greater confidence that the aftermarket should support orderrates at around current levels until new original equipment orders return.
Neutral or equivalent outlook –Six firms or 42.9% - Target prices in the $52.00-$53.00 range. The cautious firms believe China will not continue to build stockpiles of commodities at the rates seen in 1H09. Firms noted thatChina’s stimulus is focused on infrastructure, which will use commodities slowly in the early stages. This may lead to declines in the spot prices of commodities, historically resulting in declines for the shares. Additionally, firms believe light order activity in 2H09 will renew investor concerns about a deeper trough with earnings going to levels closer to $1.00 per share in FY11. Firms prefer Joy Global in the medium term because of their stronger aftermarket franchise. However, BUCY’sexcellent positioning and international exposure along with the need to dig deeper and extract more earth to uncover the same amount of product, makes it an attractive takeover candidate.
November 5, 2009
Recent Events
OnOctober 22, 2009, BUCY announced its 3Q09 financial results. Highlights are as follows:
- Total revenue was $675.8 million versus $646.0 million in 3Q08.
- Operating profit was $136.6 million versus $103.0 million in 3Q08.
- Net income was $92.1 million versus $64.2 million in 3Q08.
- EPS was $1.21 versus $0.85 in 3Q08.
Overview
Headquartered in South Milwaukee, Wisconsin, Bucyrus International, Inc. (BUCY or the Company) was founded in 1880. It engages in the design and manufacture of mining equipment for the extraction of coal, copper, oil sands, iron ore, and other minerals in mining centers worldwide. Its surface mining original equipment includes draglines, which are primarily used in coal mining applications to remove overburden; electric mining shovels that are primarily used to load copper, coal, oil sands, iron ore, other mineral bearing materials, or rock into trucks; and rotary blasthole drills, which are used to drill holes. The Company also supplies replacement and upgrade parts and services for its installed base of original equipment. Its aftermarket offerings include engineered replacement parts, maintenance and repair labor, technical advice, refurbishment and relocation of machines, structural and mechanical engineering, non-destructive testing, repairs and rebuilds of machine components, product and component upgrades, turnkey assembly, and equipment operation and management under maintenance and repair contracts. Additionally, the Company supplies system solutions for underground coal mining. Its longwall equipment includes hydraulic roof supports and electro-hydraulic controls, automated plow systems, and shearers and armored face conveyors, including entry conveyors with a built-in crusher; and room and pillar equipments comprising continuous miners, feeder breakers, battery- and diesel-powered underground utility vehicles, continuous haulage systems, roof bolters, and belt systems. The Company sells its equipment and aftermarket parts and services directly through Company personnel in the United States and in international markets.
Further information on the Company can be found at its website:
Key investment considerations as identified by firms are as follows:
Key Positive Arguments /Key Negative Arguments
- Transformational Acquisition. DBT acquisition (2Q07) more than doubled Bucyrus' consolidated revenue with world-class underground mining machinery and a $9-billion installed base, increased Bucyrus' exposure to (relatively less cyclical) coal, added meaningful scale, and augmented Bucyrus' presence in key emerging markets (including China).
- DBT Profitability. DBT's elevated SG&A expenses imply significant margin expansion potential.
- Prospects for Relatively Stronger Cycle. Significant customer consolidation has concentrated global mine capacity in fewer (typically public) entities that have taken a measured approach to capacity expansion. Constrained machinery availability and bulk transportation capacities (e.g., Australian ports) are also stretching the order cycle.
- Multi-Phase Capacity Expansion/Upgrade. Bucyrus has more than doubled its rope shovel capacity and is developing incremental dragline capacity.
- Leverage to Coal and Copper. Results particularly leveraged to global coal markets, which typically account for more than two-thirds of revenue. Worldwide coal pricesremain high (increased electricity and steel demand) and helped spur a recovery of US coal markets. Low copper inventories and strong global demand have pushed copper prices to historically high levels.
- Improving Dragline Prospects. Thirty-two draglines re-commissioned over the last five years. Management sees growing demand potential over the next few years.
- Macroeconomic Growth. Outlook is contingent on sustained global economic growth, with an emphasis on the outlook for the US economy (Bucyrus' largest market). Global macroeconomic outlook is increasingly dependent on sustained growth in emerging economies (e.g., China, India).
- Developing Economies. Political and/or monetary instability in rapidly developing economies (e.g., China, India) could adversely impact local demand for Bucyrus' machinery and services and/or demand for key mined commodities.
- Commodity Prices. Historically high commodity (e.g., coal and copper) prices are driving significant growth in demand for associated capital equipment, and are also supporting increased investment in energy and transportation infrastructure and building construction. Beyond sharp price declines, severe commodity price volatility can also deter investment. Bucyrus' stock price can be highly correlated to oil prices.
- Foreign Currency. Operating results are sensitive to changes in the foreign exchange value of the US$, particularly versus the euro, Canadian dollar, Australian dollar, Brazilian real, Chilean peso, and South African rand.
- Acquisition Execution. Management's growth strategy depends in part on its ability to identify, consummate, and successfully integrate acquisitions.
NOTE: The Company’s fiscal year ends on December 31.
November 5, 2009
Revenue
CONSENSUS PROJECTED SALES
TOTAL REVENUE ($M) / 3Q08A / 2Q09A / 3Q09A / 4Q09E / 1Q10E / 2008A / 2009E / 2010E / 2011EZacks Consensus / $630.0 / $531.0 / $2,613.0 / $2,379.0
Digest High / $646.0 / $724.4 / $676.0 / $646.7 ↓ / $594.8 / $2,506.0 / $2,652.6 ↓ / $2,564.4 ↓ / $2,813.9 ↓
Digest Low / $646.0 / $724.0 / $675.8 / $606.0 ↑ / $482.0 / $2,505.8 / $2,612.0↑ / $2,212.0↑ / $2,376.7↑
Digest Average / $646.0 / $724.3 / $675.8 / $622.7 ↑ / $543.9 / $2,505.8 / $2,628.7↑ / $2,383.6↑ / $2,594.4↑
YoY Growth / 29.1% / 16.6% / 4.6% / -13.7% / -10.2% / 55.3% / 4.9% / -9.3% / 8.8%
Quarterly growth / 4.0% / 19.6% / -6.7% / -7.9% / -12.7%
3Q09Summary: Total revenue was $675.8 million, up 4.6% from $646.0 million in 3Q08.
SEGMENT REVENUE
Segment Revenue ($M) / 3Q08A / 2Q09A / 3Q09A / 4Q09E / 1Q10E / 2008A / 2009E / 2010E / 2011EOriginal equipment-SM / $155.6 / $150.3 / $119.8 / $116.4 ↓ / $106.3 / $622.9 / $533.5 ↓ / $443.2 ↑ / $445.6↑
Aftermarket parts and service-SM / $181.6 / $205.7 / $193.1 / $180.4↑ / $165.7 / $659.7 / $743.1↑ / $721.1↑ / $802.5 ↑
Total Surface Mining Revenue / $337.1 / $356.0 / $312.9 / $296.5 ↓ / $272.0 / $1,282.6 / $1,276.5 ↓ / $1,166.5↑ / $1,258.1↑
Original equipment-UM / $186.0 / $216.5 / $215.8 / $191.4↑ / $140.9 / $737.7 / $804.8↑ / $668.1 ↓ / $723.2 ↑
Aftermarket parts and service-UM / $122.8 / $151.9 / $147.1 / $138.2↑ / $113.3 / $485.8 / $550.9 ↑ / $537.7 ↑ / $592.0 ↑
Total Underground Mining Revenue / $308.9 / $368.3 / $362.9 / $327.1↑ / $254.2 / $1,223.2 / $1,353.0↑ / $1,205.7↑ / $1,322.2↑
Total Revenue / $646.0 / $724.3 / $675.8 / $622.7↑ / $543.9 / $2,505.8 / $2,628.7↑ / $2,383.6↑ / $2,594.4↑
Revenue by Segment
Surface Mining:Total surface mining revenue in 3Q09 was $312.9 million versus $337.1 million in 3Q08, a y/y decrease of 7.2%.
As per the Zacks Digest model, firms project segment revenue to be $1,276.5 million for FY09, $1,166.5 million for FY10 and $1,258.1 millionfor FY11 with y/y decline of 0.5% in FY09 and8.6% in FY10 and a growth of7.9%FY11.
Surface mining original equipment revenue in 3Q09 was $119.8 million, a y/y decrease of 23.0% from $155.6 million in 3Q08, primarily attributable to decreased electric mining shovel sales, partially offset by increased percentage of completion revenue recognized from the manufacture and assembly of walking draglines in Australia and Canada
Electric mining shovel sales in the reported quarterdeclined slightly y/y. Blasthole drill sales for the quarter remained flat y/y.
New orders during 3Q09 were $107.5 million, down from $202.3 million in 3Q08 primarily due to a decline in electric mining shovel and blasthole drill new orders, which was attributable to the reduced demand for the commodities mined by Bucyrus equipment as a result of the current global economic conditions.
As per the Zacks Digest model, firms project segment revenue to be $533.5 million for FY09, $433.2 million for FY10 and $445.6 million for FY11 with y/y decline of 14.4% and16.9% and a growth of 0.6%, respectively.
Surface mining aftermarket parts and service sales in 3Q09were $193.1 million, an improvement of 6.3% from $181.6 million in 3Q08. The y/y improvement was primarily in the Chilean market with moderate increases in the Canadian and Chinese markets, offset by a decline in the Australian and Peruvian markets. Surface mining sales for the quarter were negatively impacted by approximately $6.2 million due to the effect of the stronger U.S. dollar on sales denominated in foreign currencies.
New orders during 3Q09 were $186.0 million, up from $159.2 million in 3Q08. The increase was primarily in Australia.
As per the Zacks Digest model, firms project segment revenue to be $743.1million for FY09, $721.1 million for FY10 and $802.5 million for FY11 with y/y growth of 12.6%, decline of 3.0% and again a growth of 11.3%, respectively.
Underground Mining:Total Underground mining revenue in 3Q09 was $362.9 million versus $308.9 million in 3Q08, a y/y increase of 17.5%.
As per the Zacks Digest model, firms project segment revenue to be $1,353.0 million for FY09, $1,205.7 million for FY10 and $1,322.2 million for FY11 with y/y growth of 10.6%, decline of 10.9% and a growth of 9.7%, respectively.
Underground mining original equipment sales in 3Q09 were $215.8 million, up from $186.0 million in 3Q08 driven by increases in all product lines.
New orders during 3Q09 were $207.9 million, down from $467.1 million in 3Q08 attributable to larger longwall new orders with customers in the United States, Germany and China during the third quarter of 2008 and reduced new orders in all product lines in 2009 as a result of current global economic conditions. Longwall and room and pillar new orders have been negatively impacted in 2009 as a result of the current global economic conditions.
As per the Zacks Digest model, firms project segment revenue to be $804.8 million for FY09, $668.1 million for FY10 and $723.2 million for FY11 with y/y growth of 9.1%, decline of 17.0% and growth of8.3%, respectively.
Underground mining aftermarket parts and service sales in the reported quarter were $147.1 million, up from $122.8 million in 3Q08 driven primarily by increased longwall replacement projects in the United States market as well as increased sales in the Czech Republic market, offset by a decline in the South African market due to a large longwall extension in 2008. Reported quarter sales also increased in the Australian market as a result of large rebuild orders from customers to extend the lives of their existing Bucyrus mining equipment. Underground mining sales for the quarter were negatively impacted by approximately $11.6 million due to the effect of the stronger U.S. dollar on sales denominated in foreign currencies.
New orders during 3Q09 were $126.1 million, down from $151.1 million in 3Q08. The decrease was primarily in the United States and the CzechRepublic.
As per the Zacks Digest model, firms project segment revenue to be $550.9 million for FY09, $537.7 million for FY10 and $592.0 million for FY11 with y/y growth of 13.4%, decline of 2.4%, and a growth of 10.1%, respectively.
A graphical representation of the revenue segments is given below:
Guidance
Management increased 2009 revenue guidance to a range of $2.60-$2.625 billion versus the prior guidance of $2.5 billion
Overall Outlook
One firm (J.P. Morgan) expects OE revenues to be better than previously expected in 2010, driven by a pickup in OE activity through 2010 and a stronger aftermarket. It expects OE revenues to be down 10% in Surface and down 25% in Underground and aftermarket revenues to be up 25% in Surface and up 10% in Underground in 2010.
One firm (Sterne, Agee & Leech) expects higher production rates at mines will drive aftermarket revenues (55% of revenues) and stabilize lower original equipment orders over the next 6 months.
As per the Zacks Digest model, the firms expect total revenue to be $2,628.7 million for FY09, $2,383.5 million for FY10 and $2,594.4 million for FY11, with a y/y increase of 4.9% and decline of 9.3% and a growth of 8.8%, respectively
Please refer to the Zacks Research Digest spreadsheet on BUCY for more details.
Margins
CONSENSUS PROJECTED MARGINS
Margins / 3Q08A / 2Q09A / 3Q09A / 4Q09E / 1Q10E / 2008A / 2009E / 2010E / 2011EGross / 28.2% / 28.3% / 33.1% / 29.8%↑ / 29.3% / 27.4% / 29.9%↑ / 29.3%↑ / 29.4%↓
Operating / 16.0% / 17.8% / 20.2% / 17.1%↑ / 15.5% / 15.5% / 17.8%↑ / 16.4%↑ / 17.2%↑
Pre Tax / 14.9% / 16.9% / 19.4% / 16.1%↑ / 14.4% / 14.2% / 16.7%↑ / 15.4%↑ / 16.3%↑
Net / 10.0% / 11.4% / 13.7% / 10.9%↑ / 9.9% / 9.5% / 11.4%↑ / 10.5%↑ / 11.1%↑
Cost of products sold in 3Q09 was $451.9 million, a y/y decline of 2.3%. Gross profit increased 22.8% y/y to $223.8 million in 3Q09 driven by the mix of original equipment sales in both the surface and underground mining segments and increased underground mining segment sales. Gross margin was 33.1%, up from 28.2% in 3Q08.
SG&A expense in the reported quarter was $71.4 million, up 7.7% y/y while R&D expense was $11.3 million, down 26.9% y/y.
Operating income in 3Q09 was $136.6 million in 3Q09, up 32.3% from $103.3 million in 3Q08. Operating margin improved 420 basis points y/y to 20.2% in the reported quarter.
Net income in the reported quarter was $92.4 million in 3Q09, up 42.6% from $64.8 million in 3Q08. Net margin improved 370 basis points y/y to 13.7% in the reported quarter.
Segment Operating Margins / 3Q08A / 2Q09A / 3Q09A / 4Q09E / 1Q10E / 2008A / 2009E / 2010E / 2011ESurface / 21.4% / 22.8% / 25.0% / 21.8%↑ / 20.8% / 19.7% / 22.6%↑ / 20.3%↑ / 21.7%↑
Underground / 11.8% / 15.5% / 23.2% / 18.6%↑ / 12.8% / 12.6% / 17.3%↑ / 15.5%↑ / 15.9%↑
Operating Income by segments
Surface mining: The segment reported operating profit of $78.2 million, a y/y increase of 8.2% representing operating margin of 25.0%, a y/yincrease of 360 basis points.
Firms project operating income to be $289.1 million for FY09, $236.6 million for FY10 and $272.5 million for FY11 with y/y growth of 14.4% while decline of 18.2% and 15.2%, respectively.
Underground mining: The segment reported operating profit of $72.6 million, a y/y increase of 82.0% representing operating margin of 23.2%, up from 11.8% in 3Q08.
Firms project operating income to be $220.2 million for FY09, $181.3 million for FY10 and $200.6 million for FY11 with y/y growth of 36.6% while decline of 17.7% and a growth of 10.6%, respectively.
Expense outlook
Management expects EBITDA in a range of $515-$530 million, up from prior guidance of $485-$500 million.
As per the Zacks Digest model, thefirms expectcost of sales to increase at a slower rate than total revenue in FY09 (1.4% versus 4.9%)leading to expansion in gross margin. However, firms expect cost of sales to decline at a slower rate than total revenue decline in FY10 (-8.4% versus -9.3%) and increase at a faster rate than total revenue increase in FY11 (10.0% versus 8.8%) leading to gross margin contraction.
The firms expect SG&A expense growth to be faster than total revenue growth in FY09 (6.7% versus 4.9%) and decline at a slower rate than total revenue decline in FY10 (-3.2% versus -9.3%) affecting operating margin expansion. However, the firms project SG&A expense increase at a slower than total revenue in FY11 (6.4% versus 8.8%) favoring operating margin expansion.
The firms also expect R&D expense to increase at a rate of 9.6% in FY09, 4.5% in FY10 and 12.8% in FY11 versus total revenue growth of 4.9%, decline of 9.3% and growth of 8.8%, respectively. Operating margin is thus expected to contract in FY09, FY10 and FY11.
Firms project operating profit of $467.3 million for FY09, $391.4 million for FY10 and $445.3 million for FY11 representing y/y growth of 20.5%, while decline of 16.2% and again a growth of 13.8%, respectively.
Firms project net profit of $300.5 million for FY09, $249.5 million for FY10 and $288.4 million for FY11 representing y/y growth of 26.3%, while decline of 17.0% and a growth of 15.6%, respectively.
Please refer to the Zacks Research Digest spreadsheet on BUCY for more details.
Earnings per Share
BUCY reported EPS of $1.21 versus $0.86in 2Q08. Reported quarter EPS was above the consensus estimate of $0.86.
EPS in $ / 3Q08A / 2Q09A / 3Q09A / 4Q09E / 1Q10E / 2008A / 2009E / 2010E / 2011EDigest Max. / $0.90 / $1.11 / $1.24 / $0.98 / $0.80 / $3.35 / $4.07 ↑ / $3.77 ↑ / $4.20↑
Digest Min. / $0.85 / $1.06 / $1.21 / $0.80 ↑ / $0.57 / $3.10 / $3.85 ↑ / $2.70 ↑ / $3.00↑
Digest Avg. / $0.86 / $1.08 / $1.21 / $0.91 ↑ / $0.72 / $3.14 / $3.97 ↑ / $3.35 ↑ / $3.80 ↑
YoY growth / 98.3% / 28.6% / 41.0% / 2.5% / -6.0% / 72.5% / 26.7% / -15.8% / 13.6%
Quarterly growth / 2.2% / -65.5% / 12.1% / -25.2% / -20.5%
Highlights from the chart are as follows:
- 2009 forecasts (8 firms) range from $3.85 to $4.07; the average is $3.97.
- 2010 forecasts (8firms) range from $2.70 to $3.77; the average is $3.35.
- 2011 forecasts (7firms) range from $3.00 to $4.20; the average is $3.80.
Outlook
One firm (Barclays Capital) raised the estimates for FY10 and FY11as it expects BUCY to have significantly larger new awards contribution from emerging markets such as India, China, and Russia,as well as more traditional international miners slowly ramping up their capital spending.
One firm (Longbow) raised the estimate for FY10 based on higher margin expectations in the Underground business.
Another firm (R W. Baird) raised the estimate for FY10 primarily reflecting a smaller forecast OE revenue decline, a higher 2009 revenue base, and stronger margin assumptions.