Uncle John's Cabin

Fishing Downstream for BUCY

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Other than my Taco plays (ag), in this economy, like many others in this game, hard assets seem to be where the money is. What I have been looking for is a road less traveled to profits in this area. The upstream stocks are so expensive it seems hard to find the right trigger points.

Here's a list of what I keep hearing about. Oil is up, oil research and exploration spending is up, the oil services companies are touted daily, mining is up, steel is up, ore is up and of course precious metals and coal. While thinking about this, I heard of a seemingly under looked company that can benefit from all of these plays. Every one of these industries are selling at a pretty high PE ratio although, probably well deserved to a degree but I am looking for somethign cheaper.

Consider the oil situation and follow it downstream with me. To get more oil, you need to drill so the oil services companies, (SLB), (HAL) get involved. To run their businesses they need large amounts of steel for rigs, pipes, drills and other equipment. Companies making steel like US Steel (X) and Nucor (NUE) and the rest need iron ore and coal to make steel. That leads me to the miners of both coal and ore. Arch Coal (ACI), (RIO) etc. What do all of these companies need? Heavy mining equipment. Right now, I know of only two major heavy mining players in the market. The much touted Joy Global and lesser known company controlling basically a duopoly. Add this list to the obvious and direct mining benefits and we have a winner.

Current disclosure, I already own ConocoPhillips (COP), Schlumberger (SLB), US Steel (X) and Arch Coal (ACI). (I get a two-fer in the steel as I like the infrastructure play and a three-fer in coal as energy costs rise and the shortage of coal as well as the steel infrastructure play.) I have yet to take a stake in the miners but am looking.

That brings me back to the bottom (or top?) of the food chain. The heavy mining equipment manufacturers. Joy Global and... wait for it..., Bucyrus Inc. (BUCY). OK, I got this name from CNBC but after looking into it, this fits what I have been trying to do all along, go to the source and look for the suppliers for the hot markets that can play well with various themes.

While Joy Global has gotten most of the news attention, Bucyrus has been firing on all cylinders only posting a disappointing quarter once in the last five years. Joy on the other hand is trying to raise capital by issuing more shares and just lost their CFO this week. Small insider positions are being bought at Bucyrus as of yesterday and Joy has had some insider selling as well as institutional selling in recent months. Bucyrus has less coverage by analysts so is a little more off the radar of Wall Street which is always something I like but still gets better ratings. Revenue and income growth last year was 118% and 252% respectively for Bucyrus while Joy's numbers are 6% and -18%. I have to assume Joy's income growth was due to some one time charge but either way, Bucyrus seems to be blowing it out of the water. It is a smaller company with about 1.6B in sales compared to 2.5B for Joy but it is clearly not half as small and is in the same league but seems to give it room for more growth. Forward PE ratios for both companies are about 20 +/- .5. On the other side, Joy beats with a slightly better net profit margin and a lower debt to equity ratio but I believe the growth in Bucyrus is worth that.

I like buying best of breed with limited competition and Bucyrus seems to fit the bill for me. It seems to work well with a number of different themes I am playing as well as being the under looked company on Wall Street. I'll be looking for a good entry point starting today.

Happy fishing and don't forget to look down steam.
Uncle John