Anixter International [NYSE:AXE] April 27, 2009: $36.30
52-week range: $20.97 (Nov. 21, 2008) - $75.07 (Sep. 2, 2008)
Anixter is the world’s largest distributor of communication products, wire and cable. They also distribute small electrical parts to OEM manufacturers. 2008 revenues came in at an all-time record $6.136 billion. AXE maintains about 20% worldwide market share with around 70% of sales coming from North America, 21% from Europe and 9% from Asia and Latin America.
The global economic slowdown has hurt sales and earnings since they peaked in 2007. EPS dropped from $6.00 to $5.07 from 2007 to 2008. A further contraction to about $3.72 is expected for
this year.
So why be interested in Anixter right now? Because the share price has already reflected the bad news. AXE traded as high as $75.07 just last September and touched $88.40 at their peak in 2007. At today’s $36.30 the shares are just 9.8x the already reduced 2009 estimate and only 1.23x year-end 2008’s book value.
When economic times were better AXE often traded at 15x earnings and double to triple book value. While I don’t see a near term catalyst to make Anixter surge higher, I also see little risk of a major decline.
Value Line uses an 11 multiple in figuring their 3 – 5 year projections. Even eleven times the $3.72 projection would bring AXE shares back to $40.92 by year end. Morningstar calls ‘fair value’ at $42.
Here’s what looks like a great play even if you think AXE will just ‘hang around’ through next January:
……………………................……………. Cash Outlay ……..........…. Cash Inflow
Buy 1000 AXE @$36.67 …........……. $36,300
Sell 10 Jan. $35 calls @$7.70 ………………....................………….. $7,700
Sell 10 Jan. $35 puts @$6.20 ………………..................…….…….. $6,200
Net Cash Out-of-Pocket ….......……… $22,400
If AXE shares stay above $35 through expiration date on January 15, 2010:
Your $35 calls will be exercised.
You will sell your shares for $35,000.
Your $35 puts will expire worthless.
You will have no further option obligations.
You will hold no shares and $35,000 for your original $22,400 outlay.
That’s a best-case scenario profit of $12,600 (+56%) achieved in less than nine months on shares which did not have to go up at all from the trade’s inception.
In fact, you make that 56% cash-on-cash return if the shares climb, stay unchanged, or even if they drop by $1.30 (-3.6%) back to $35.
What’s the risk?
If Anixter stays below $35 on expiration date:
Your $35 calls will expire worthless.
Your $35 puts would be exercised.
You will be forced to buy another 1000 shares and to lay out an
additional $35,000 cash.
You will own 2000 shares of AXE.
What’s the break-even on the whole trade?
On the original shares it’s the $36.30 purchase price less the $7.70 /share
call premium = $28.60 /share.
On the ‘put’ shares it’s the $35 strike price less the $6.20 /share
option premium = $28.80 /share.
Your net break-even price is the average of those = $28.70 /share.
AXE could fall by as much as $7.60 /share or (-20.9%) without you suffering a loss.
Disclosure: Author is long AXE shares and short AXE options.
52-week range: $20.97 (Nov. 21, 2008) - $75.07 (Sep. 2, 2008)
Anixter is the world’s largest distributor of communication products, wire and cable. They also distribute small electrical parts to OEM manufacturers. 2008 revenues came in at an all-time record $6.136 billion. AXE maintains about 20% worldwide market share with around 70% of sales coming from North America, 21% from Europe and 9% from Asia and Latin America.
The global economic slowdown has hurt sales and earnings since they peaked in 2007. EPS dropped from $6.00 to $5.07 from 2007 to 2008. A further contraction to about $3.72 is expected for
this year.
So why be interested in Anixter right now? Because the share price has already reflected the bad news. AXE traded as high as $75.07 just last September and touched $88.40 at their peak in 2007. At today’s $36.30 the shares are just 9.8x the already reduced 2009 estimate and only 1.23x year-end 2008’s book value.
When economic times were better AXE often traded at 15x earnings and double to triple book value. While I don’t see a near term catalyst to make Anixter surge higher, I also see little risk of a major decline.
Value Line uses an 11 multiple in figuring their 3 – 5 year projections. Even eleven times the $3.72 projection would bring AXE shares back to $40.92 by year end. Morningstar calls ‘fair value’ at $42.
Here’s what looks like a great play even if you think AXE will just ‘hang around’ through next January:
……………………................……………. Cash Outlay ……..........…. Cash Inflow
Buy 1000 AXE @$36.67 …........……. $36,300
Sell 10 Jan. $35 calls @$7.70 ………………....................………….. $7,700
Sell 10 Jan. $35 puts @$6.20 ………………..................…….…….. $6,200
Net Cash Out-of-Pocket ….......……… $22,400
If AXE shares stay above $35 through expiration date on January 15, 2010:
Your $35 calls will be exercised.
You will sell your shares for $35,000.
Your $35 puts will expire worthless.
You will have no further option obligations.
You will hold no shares and $35,000 for your original $22,400 outlay.
That’s a best-case scenario profit of $12,600 (+56%) achieved in less than nine months on shares which did not have to go up at all from the trade’s inception.
In fact, you make that 56% cash-on-cash return if the shares climb, stay unchanged, or even if they drop by $1.30 (-3.6%) back to $35.
What’s the risk?
If Anixter stays below $35 on expiration date:
Your $35 calls will expire worthless.
Your $35 puts would be exercised.
You will be forced to buy another 1000 shares and to lay out an
additional $35,000 cash.
You will own 2000 shares of AXE.
What’s the break-even on the whole trade?
On the original shares it’s the $36.30 purchase price less the $7.70 /share
call premium = $28.60 /share.
On the ‘put’ shares it’s the $35 strike price less the $6.20 /share
option premium = $28.80 /share.
Your net break-even price is the average of those = $28.70 /share.
AXE could fall by as much as $7.60 /share or (-20.9%) without you suffering a loss.
Disclosure: Author is long AXE shares and short AXE options.
