"I'm adding Bucyrus International (NaSDaQ: BUCY) -- a maker of mining equipment -- to our 'Wildcatters Portfolio' as a play on coal," says Elliott Gue.
In his The Energy Strategist, he explains, "With commodity prices recovering and Chinese demand for coal picking up once again, Bucyrus has likely seen the trough in its new equipment business."
"Bucyrus' top end-market is coal, which accounts for more than three-quarters of the firm's business."
"Coal mining equipment includes draglines, a sort of giant scoop used to scrape away the overburden (rocks and dirt) that covers coal.
"Draglines are primarily used in surface mining operations where the coal is located relatively close to the surface of the earth--the Powder River Basin in the western US would be an example.
"Draglines are truly enormous pieces of equipment that can cost as much as $200 million for the largest models.
"Other products include longwall systems, in which large shears are used to cut coal from underground mines. Its systems also include ancillary products such as roof supports that prevent mine collapse as coal is removed.
"And Bucyrus also makes belt systems used to move coal mined deep underground to the mouth of the mine for loading and removal.
"The company sells new equipment, and provides after-market parts and services; roughly half of its revenues come from new equipment and the other half comes from after-market services.
"Sales of new equipment grew rapidly through mid-2008, as high commodity prices prompted mining companies to upgrade from older systems.
"The combination of falling commodity prices and troubled credit markets conspired to squelch this boom. But several positive trends have helped to offset the decline in new sales.
"Because miners have cut back on new equipment orders, they've been running their existing machines harder and spending more on maintenance and parts -- a boon for Bucyrus' after-market parts and services business.
"Better yet, thanks to strong sales and market share gains, the installed base of Bucyrus' equipment has tripled since 2004; higher penetration translates into more parts and service contracts. Bucyrus has built and commissioned a total of 35 draglines in the past 5 years alone.
"Second, Bucyrus still has a $2 billion backlog of orders left over from the recent boom. Although the company has allowed some customers to push back orders, it's minimized outright cancellations.
"The backlog has dropped only $500 million since the end of 2008, despite the drop-off in mining activity at the beginning of 2009.
"Bigger mining outfits should continue to fulfill their contractual obligations, providing a cushion in these lean quarters.
"Third, Bucyrus has systematically cut its expenses to shore up margins. The company reduced headcount, shuttered underperforming factories and reduced costs by installing more-efficient manufacturing equipment.
"The company's guidance is that revenues will drop only slightly in 2009 while profits will actually increase thanks to lower costs.
"I'm looking for a return to revenue growth late this year as new orders surge again. Buy Bucyrus International under $42."
