Bucyrus Goes from Tepid to Bullish

After months of steady recovery and on-going increases in commodity prices, Bucyrus International (BUCY) has finally gone from tepid to bullish in its outlook.

During August’s conference call, Timothy Sullivan, President & CEO, declared 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. Last week, BUCY sounded almost unabashedly bullish about the global economy in its commentary and its guidance (all quotes from Seeking Alpha transcripts).

Sullivan introduced guidance by explaining that “based on our current performance, we will do something here this morning that we don’t normally do, only at the end of Q2 do we readjust guidance, but obviously based on our third quarter performance, I’m sure most of you are curious as to where we think we are going to end up the year with our fourth quarter performance or follow on fourth quarter performance.” BUCY tightened 2009 revenue guidance to a range of $2.6-2.625B and EBITDA guidance to a range of $515-530M. The revenue guidance is an increase of $100M, and the EBITDA guidance range shifted upward by $30M. On the surface, it seems odd that such a small change caused the stock to soar – closing up 14% (spiking as high as 19%) for a 13-month high (see chart at the end of this post) at over FIVE TIMES average volume – on a day in which the stock market was sold aggressively. However, I think traders and investors responded much more to the commentary and tone from the conference call and a related expectation that guidance in February will get even better.

Here are a few quotes from the conference call that demonstrate BUCY’s increased confidence and optimism.

1. “We had no cancellations this quarter and we really don’t expect any further cancellations in the future.
2. We believe that the commodity prices have bottomed and have stabilized in almost all instances.
3. We’ve seen an increase in OE [original equipment] quotation activity over the past quarter and we fully expect that that will continue as we move into the fourth quarter of 2009, and it also looks to be a sustainable into the early part of 2010, just based on our discussions with our customer base around the world.
4. The reason we feel pretty strong about continued OE activity is the big five [mining companies] are starting to wake up…if you look at the basic needs and look at the basic requirements we feel pretty strong that there is going to be an up tick in capex spending by the big five as we move into ’10, just out of pure necessity.”

Note well that BUCY is very clear that business is booming outside the U.S. and the “developed world”: “With the exception of the domestic US market, which we don’t see any recovery in the next six to 12 months…we see glimmers of activity almost everywhere…It’s the emerging BRIC economies that continue to lead the way to global recovery as the developed world continues to recover slowly.” In particular, BUCY sees rapidly growing opportunities in India and Russia. India’s political climate has become more conducive to foreign investment and business. Russia has become less insular and has finished building railroads to eastern ports which will facilitate the export of coal.

Interestingly, China is NOT a source of great opportunity for BUCY. While BUCY thinks that China’s stimulus spending has been very successful, China has designated mining as “strategically critical” which mandates purchase of locally produced mining equipment: “So we have got some activity, but we are not holding out any false hope that that’s a sustainable type of level of activity. We think that it’s just nice to have.”

I never got the pullback from the August earnings report that would have encouraged me to finally buy some BUCY shares. BUCY is incredibly now 50% higher than those levels, and I am left uncertain how to approach the shares for now – forward P/E is now a lofty 21, but P/S is a decent 1.2. On the flip side, BUCY’s report supports my on-going bullishness on commodities.

*Chart created using TeleChart:

Be careful out there!

Full disclosure: no positions