Broadpoint Amtech is downgrading Bucyrus International (NASDAQ:BUCY) to Neutral from Buy saying they believe the rising momentum driving Bucyrus shares has skewed the risk/reward following a string of positive catalysts. With shares within 10% of firm's target and mounting evidence that China will tighten loan standards (the China commodity story is a main driver of prices, profits and capex), they introduce some near-term concerns that drive their downgrade.
Terex' accretion still unknown, but universally expected to be positive. Broadpoint expects to see details soon, but they currently believe high Terex inventories and DSOs (where BUCY is already well above Joy Global) are a concern. Also, the firm believes the stock component of the deal and a slower integration than the DBT deal (e.g. cross-selling, after-market exploitation, manufacturing) could lead to a multiple de-rating in the short-run; in their opinion, the bar is set inappropriately high in the short-run relative to public information.
- $6 EPS discounted into stock price, leaving little room for near-term disappointment: While they believe earnings power in excess of $6 is very much within the Bucyrus/TEX long-term model, they also believe investors are discounting too much of that $6 into valuation at this time for the reasons mentioned above, and given the cyclical nature of those peak earnings.
- China policy action could slow second derivative loan growth/coal beta: Broadpoint believes investors have awarded a premium to out-year assumptions due to strong China commodity demand, and Bucyrus' stock is strongly correlated to China coal data. China is making it clear through its policy actions that it intends to cool off speculative lending and it is ending its stimulus programs. As a result, the multiple investors are willing to apply to the China demand story may be muted, absent (thus far) a US/Europe/Japan recovery.
- Firm notes they still see upside potential to their $75 target in 2010 and longer-term upside beyond their target, but near-term risks could create a better entry point as a number of positive data points are already in the stock.
Notablecalls: The Goldman pump (adding to Conviction Buy list) didn't work much yesterday and with Broadpoint downgrading the stock today on potential China headwinds could cause some weakness as the GSCO buyers bail.
The call is short and to the point. Pretty much the way I like it.
Could be worth 2pts+ to the downside if the market decides to cooperate.