Inside Wall Street: Digging Into Mining Equipment Giant Bucyrus

Global mining activity is starting to heat up again, fueled by the improving fundamentals in coal, iron ore and copper due primarily to the surging demand from China, India and other developing economies. So expect some mining-equipment stocks to get fired up.

"We believe mine production is ramping and numerous miners are beginning to move forward with their expansion projects that were previously on hold," says Steve Barger, analyst at KeyBank Capital Markets.Mathew Christy, mining analyst at Standard & Poor's, notes that mining capacity utilization in the U.S. has recently increased and remains well above the 80% level. This suggests to him that orders for equipment and replacement parts and services will improve.

Industry leader Bucyrus International (BUCY) in particular, Christy argues, is well positioned to gain from the long-term growth in demand for commodities resulting from the industrialization of emerging markets, combined with the continuing need for resources in the developed nations. He describes the company as "one of the best-run and strongest competitors" in the industry.

An S&P "Focus Stock"

Bucyrus is a global manufacturer of large-scale surface and underground mining equipment used for mining coal, iron ore, copper oil sands and other minerals. Its products include huge cranes with earth-scooping buckets, electric mining shovels that can lift 100 tons, conveyor belt systems and rotary "blasthole" drills. Bucyrus is S&P's top Focus Stock this week and gets its top rating of strong buy.

Currently trading at $54 a share, Bucyrus is down from its high of $68.57 reached on Jan. 11, 2010. The stock traded as low as $27.95 on Sept. 2, 2009. But KeyBank's Barger, who rates the stock a buy, recently raised his 12-month target to $82 from his previous $68, due mainly to improving mining fundamentals.

Barger also views Bucyrus's pending acquisition of the mining unit of Terex (TEX), a global maker of hydraulic excavators, trucks and other mining equipment, as a "solid bolt-on that, when combined with its existing products could produce earnings power north of $5 a share in the 2012 to 2015 time frame." He concedes that Bucyrus is a high-beta stock, and could be volatile. But he also argues that when investors begin to discount the full earnings power of the "new" Bucyrus, in conjunction with improving global mining fundamentals, the stock could trade at a higher price-earnings ratio.

"Upside in Absolute and Relative Terms"

The stock's current p-e multiple is about 13, way below its historical ratio of 17.5, notes the analyst. For 2009, Barger expects Bucyrus to earn $4.01 a share, up from 2008's $3.10. Then he sees it easing to $3.75 in 2010, but then regaining momentum and leaping to $4.16 in 2011. His new price target of $82 a share translates to p-e multiple of 20 times his 2011 estimate, and 17.6 times his 2012 estimate of $4.65.

Morgan Stanley analyst Robert Wertheimer says in a recent note to clients that he favors Bucyrus among mining-equipment stocks: "We see the Terex transaction as 25% to more than 50% accretive [to earnings] under reasonable assumptions."

He says the stock is trading about 15% below its major competitor, Joy Global (JOYG), since the Terex deal was announced. "We see upside in absolute and relative terms," says Wertheimer, who rates the stock overweight with a 12-month price target of $71 a share.

With some investors looking for stocks that would benefit from the renewed jump in demand for commodities, giant mining-equipment maker and supplier Bucyrus may well be the name to dig into.
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